10.
x u r b a n c h i n a
1.1 China’s impressive economic growth has been accompanied by a massive
population shift into urban areas . 84
B1.1.1 Urbanization is inextricably linked to economic growth. . 85
1.2 Growth is increasingly dependent on capital accumulation as productivity
from reallocation of labor and capital is declining . 87
1.3 Small cities are less efficient users of capital, increasingly so over time,
1995–2011. . 88
1.4 Changes in labor force and urban population. . 88
B1.2.1 Lewis model. . 89
1.5 Total factor productivity has been highest in tier 1 and northeastern cities . 94
B1.5.1 Distance to major ports and economic development level of cities within a
metropolitan area . 94
1.6 Changing patterns of specialization in manufacturing and advanced services . 95
1.7 Despite recent trends, a large share of manufacturing remains in large and
medium-size cities. . 96
1.8 To become a high-income country, China will have to develop services quickly,
but the marginal product of labor in services continues to decline. . 96
1.9 Population densities of Chinese cities have fallen over the past decade as the
urbanization of land was faster than the urbanization of people. . 97
1.10 In places where economic densities are falling, growth is supported by capital
accumulation rather than by productivity increases . 98
1.11 Structure of migrants stock by type of migration by regions in 2010. . 98
1.12 Migrants go to larger cities, where wages are higher. . 99
B1.6.1 Percentage point changes in urban population shares between 1978 and 2012 . 100
B1.6.2 Urbanization rate and year country reached China’s current per capita income. . 101
1.13 Increased mobility and connectivity will support employment growth. . 102
1.14 Higher densities are associated with higher incomes and consumption. . 102
1.15 Real household incomes (adjusted for cost of real estate) are lower in the
largest cities, yet they have experienced the largest increase in population. . 103
1.16 The initial stages of urbanization and industrialization led to imbalances in
economic growth. . 104
1.17 China’s middle class continues to grow, but it remains small relative to China’s
development level. . 105
1.18 Why is urban consumption so low?. . 106
1.19 The concentration of different factors of production differs widely in China. . 107
1.20 Slow urbanization of people has slowed income convergence. . 109
B1.7.1 Estimates of China’s urbanization rates, 1974–2050. . 113
B1.8.1 Analytical structure of the growth model. . 115
1.21 Final consumption as a share of GDP, 2010–30. . 117
1.22 The energy and CO2 intensity of China’s economy will decline . 118
2.1 Per capita GDP in 2000 and 2010. . 125
2.2 Population in 2010 by city size . 126
2.3 Distribution of cities by size in China and the United States. . 127
2.4 Efficiency by city size and location in 2010. . 128
2.5 Recent trends in land use allocation from farmland to other uses. . 129
2.6 Annual construction land supply—direct vs. competitive allocation. . 130
2.7 China’s largest cities have lower densities than their peers worldwide. . 133
2.8 Urban density profile comparison between Guangzhou and Seoul. . 133
2.9 Spatial expansion of cities is associated with higher commute times. . 134

17.
Foreword
U r b a n c h i n a xvii
Today, more than half of the world’s popula-tion
lives in cities, and by 2030 that will rise
to an estimated 60 percent. Nearly all of this
growth is happening in developing countries,
where as many as 66 million people migrate
to urban areas each year. Urbanization has
historically served as an essential engine
for economic development: No country has
reached high-income status without undergo-ing
a successful urbanization process.
China’s urbanization over the last three
decades has been unprecedented in scale: 260
million migrants have moved to cities from
rural areas, supporting the country’s rapid
economic growth and development progress.
Despite the enormity of this transition, China
has avoided some of the ills often associated
with urbanization, particularly large-scale
urban poverty and unemployment. But strains
have begun to emerge in the form of rising
inequality, environmental degradation, and
the quickening depletion of natural resources.
Chinese leadership understands these
challenges. Premier Li Keqiang has placed
urbanization as one of the government’s top
priorities. In November 2012, he asked the
World Bank Group to partner with China
in conducting a joint study on the country’s
urbanization challenges. Earlier that year,
the Bank Group and China’s Development
Research Center of the State Council pro-duced
a groundbreaking study entitled China
2030: Building a Modern, Harmonious, and
Creative Society, which laid out the key, long-term
challenges facing the Chinese economy.
The urbanization study aimed to build on
this successful collaboration and help China
tackle another key development challenge:
forging a new model of urbanization.
To this end, China’s Ministry of Finance,
the Development Research Center of the
State Council, and the World Bank Group
established a joint work team to address
several overarching questions related to
China’s urbanization process, such as: How
can a new model of urbanization become an
engine for higher-quality economic growth?
How can more efficient urbanization support
China’s future economic transformation?
How can more inclusive urbanization pro-mote
integration and cohesion? How can
more sustainable urbanization help slow
environmental deterioration, achieve more
efficient use of resources, and advance food
security objectives? How can reforms to the
land, hukou, fiscal, and financial systems
reinforce China’s new vision of urbanization?
To answer these questions, the team held
a series of workshops; prepared numer-ous
studies, cases, and background papers;
and developed common ideas based on a
deep understanding of the challenges and
opportunities of urbanization in China and
around the world. This report, Urban China:

18.
xviii U r b a n c h i n a
Toward Effi cient, Inclusive, and Sustainable
Urbanization, represents the results of that
work. The report takes as its point of depar-ture
the conviction that China’s urbanization
can become more effi cient, inclusive, and sus-tainable.
However, it stresses that achieving
this vision will require strong support from
both government and the markets for policy
reforms in a number of areas.
The report proposes six main areas for
reform: first, amending land management
institutions to foster more effi cient land use,
denser cities, modernized agriculture, and
more equitable wealth distribution; second,
adjusting the hukou system to increase labor
mobility and provide urban migrant workers
with equal access to a common standard of
public services; third, placing urban fi nances
on a more sustainable footing, while foster-ing
fi nancial discipline among local govern-ments;
fourth, improving urban planning to
enhance connectivity and encourage scale
and agglomeration economies; fi fth, reducing
environmental pressures through more
efficient resource management; and sixth,
improving governance at the local level.
The report also provides recommendations
on the timing and sequencing of reforms. It
stresses the need to fi rst implement reforms
related to land, fi scal, and public service sys-tems.
Doing so will facilitate China’s transi-tion
to higher-quality economic growth.
The team prepared interim reports that
were shared with China’s top policy makers
as inputs to policy discussions on urbaniza-tion
during 2013, providing an important
basis for the formulation of China’s new
model of urbanization.
Going forward, we hope the fi nal report
will provide the insight to help central and
local authorities navigate China’s ongoing
transition to an urban-based society. More
broadly, we hope this work will provide a
useful contribution to global knowledge on
urbanization, and help other countries better
manage their urbanization challenges.
Jim Yong Kim
President
The World Bank Group
LI Wei
President
Development Research Center of the State
Council, P.R.C.

21.
a c k n o w l e d g m e n ts xxi
Mingge Lv, Hong Tang, Xianling Yang, and
Zilong Zheng (DRC), Shuanyou Ma, Li Xu,
and Yongzhen Yu (MOF), Hongye Fan, Cati-ana
Garcia-Kilroy, Lili Liu, Ira Peppercorn,
Juan Pradelli, Binyam Reja, Robert Taliercio,
and Luan Zhao (World Bank). The report
benefited from inputs from Roy Bahl, David
Painter, Baoyun Qiao, Anwar Shah, Lina Li,
and Guangrong Ma. The team benefited from
suggestions from Kang Jia, Jun Ma, Lin Xu,
and Sudarshan Gooptu, Ming Su, Jun Wang,
and other supporting report authors. Part of
the proofreading of the translation work was
provided by Jian Chen.
Supporting Report 7 “Green Urbaniza-tion”
was prepared by a joint team led by
Jinzhao Wang (DRC) and Uwe Deichmann
and Gailius Draugelis (World Bank). The
team included Jianpeng Chen, Jianwu He,
Tao Hong, Weiming Li, Xiong Niu, Guang
Shi, Zifeng Song, Haiqin Wang, Xu Wu, and
Xiaowei Xuan (DRC), and Garo Batmanian,
Liping Jiang, Todd Johnson, Xiaokai Li, Feng
Liu, Jostein Nygard, Gerald Ollivier, Binyam
Reja, Serge Salat, Christopher Sall, Rob-ert
Taylor, and Frank Van Woerden (World
Bank). The report benefited from inputs pro-vided
by Dimitri De Boer, Xiangxin Guo,
Genia Kostka, Zhi Li, Ximing Peng, Paul
Procee, Wenjin Pu, Yu Qin, Li Qu, Shuai
Ren, Yanqin Song, Xiaodong Wang, Yun
Wu, Runze Yu, Yabei Zhang, Yu Zhang, and
Xi Zhao. The team benefited from comments
and suggestions from Fei Feng, Jiankun He,
Xiulian Hu, Guang Xia, and other support-ing
report authors.
Invaluable support for the endeavor was
provided by MOF Vice Ministers Yaobin
Shi, Baoan Wang, Guangyao Zhu, Directors-
General Wenhan Ou, Shaolin Yang, Jiayi
Zou, Deputy Directors-General Zhongyong
Hu, Yida Wang, and Yingming Yang, as
well as the Chinese Executive Director to the
World Bank, Shixin Chen.
Coordination teams led by Yongzhi Hou
(DRC), Wenhan Ou and Jiayi Zou (MOF)
and Mara Warwick (World Bank), and com-prising
Dongwei Wang, Hai Wang, Yida
Wang, Yan Xie, Yingming Yang, and Licheng
Yao (MOF), Hui Han, Yupeng He, Shen Jia,
Qing Li, Peilin Liu, Hui Wang, and Xian
Zhuo (DRC), Ying Fan, Li Li, Guangqin Luo,
Yu Shang, Elaine Sun, and Hua Zhu (World
Bank) provided strong support for the suc-cessful
completion of the study. Tianshu Chen
of the World Bank served as interpreter for
the project and organized and coordinated
the translation work. Yueyang Bao and Yuan-jing
Shang of the China Development Press
and Weiling Zhang of DRC managed the
coordination and production of the Chinese
edition. The World Bank’s Kathryn Funk,
Li Li, Lasse Melgaard, and Mara Warwick
managed the coordination and production of
the English edition. The team is grateful to
Susan Graham of the World Bank’s Publish-ing
and Knowledge Division for managing
the editing and layout of the English version,
as well as to Andres Meneses for the printing
and file conversions. The International and
Comprehensive Departments of MOF, the
General Office and International Department
of DRC, and the World Bank provided effec-tive
support in organizing all the conferences,
discussion meetings, and international field
study trips throughout this research.
This research also benefited enormously
from comments and suggestions from Chi-nese
ministries and local governments,
including The National Development and
Reform Commission, Ministry of Educa-tion,
Ministry of Public Security, Ministry
of Human Resources and Social Security,
Ministry of Land and Resources, Ministry
of Environmental Protection, Ministry of
Housing and Urban-Rural Development,
and National Population and Family Plan-ning
Commission. Development Research
Centers of Shanghai, Tianjin, Chongqing,
Guangdong, Zhejiang, Inner Mongolia,
Henan, Shaanxi, Hubei, Hunan, Yunnan,
Shenzhen, Xi’an, and Zhengzhou provided
case study reports, and Finance Bureaus
of Liaoning, Henan, Sichuan, Chongqing,
Hunan, Guangdong, Hainan, and Ningbo
provided assistance in local field study trips.
The joint research team is grateful for all
their support.

22.
Executive Summary
Over the past three decades, China’s urban-ization
has supported high growth and
rapid transformation of the economy, allow-ing
people—among them some 260 million
migrants—to move from agriculture to more
productive activities. In the process, 500 mil-lion
people were lifted out of poverty, and
China managed unprecedented growth that
averaged 10 percent a year for three consecu-tive
decades. China’s cities, with abundant
labor, cheap land, good infrastructure, and
competition among local governments to
attract industry and investment, have cre-ated
an environment that has been highly
conducive to growth. Growing cities that
have become increasingly connected with
each other and with the rest of the world
have added to productivity growth through
agglomeration effects, and China’s mega cit-ies
now have income levels comparable to
some member countries of the Organisation
for Economic Co-operation and Develop-ment
(OECD).
China has avoided some of the common ills
of urbanization, notably urban poverty,
unemployment, and squalor. But strains are
starting to show. China’s growth has been
increasingly driven by investment rather than
productivity, and investment has become less
effective in generating growth at the national
as well as the city level. Urbanization has
relied excessively on land conversion and
land financing, which is causing inefficient
urban sprawl and, on occasion, ghost towns
and wasteful real estate development. Barri-ers
to migration have kept China’s urbaniza-tion
rate too low, thus underutilizing peo-ple’s
potential and exacerbating urban-rural
income inequality. Unequal access to public
services between citizens with urban house-hold
registration (hukou) and those with-out,
although diminishing, remains and is
a barrier to mobility. At the same time, the
large influx of migrants puts pressures on
urban services, and urban citizens perceive
an erosion of service quality. Rural-urban
land conversion has been inequitable in the
distribution of its gains, has added to wealth
inequalities, and has fed social unrest among
farmers whose land has been expropriated.
Despite progress in environmental stan-dards
and policies, the cost of pollution to
the nation’s health is rising as China’s popu-lation
is increasingly concentrated in cities.
And land-intensive urbanization has reduced
the availability of farmland, is competing
for scarce water resources, and is adding to
pollution that affects the quality of farm pro-duce
and food production capacity.
China’s leadership is well aware of these
challenges and has called for a new model
of urbanization to match China’s evolving
U r b a n c h i n a xxiii

23.
xxiv u r b a n c h i n a
development goals and meet the emerging
challenges. A new model can support more
efficient growth through better allocation
of land, labor, and capital; be more inclu-sive
and share benefits of urbanization more
widely than in the past; and be environmen-tally
sustainable and safeguard China’s food
security. China’s urban landscape will con-tinue
to change: the largest cities will likely
become larger and boost their role as gate-ways
to the world and centers of a diverse
economy, moving increasingly into services,
knowledge, and innovation. Secondary cit-ies
within metropolitan areas are likely to
attract more land-intensive manufactur-ing,
benefiting from specialization and links
to markets. China’s large inland cities can
compete with coastal cities if they are well
connected to markets. Hinterland cities and
rural towns would focus on activities with
firm-level scale economies and on providing
the public services that allow people to move
to opportunities elsewhere. Better allocation
of land, labor, and capital will accelerate the
shift of industry to secondary cities, and as
job opportunities open up in these areas,
migration pressures in large cities are likely
to moderate. As surplus labor diminishes
with more rapid urbanization, the wage share
in gross domestic product (GDP) will rise
and urban-rural disparities will narrow. That
would also promote consumption—increas-ingly
driven by a growing middle class,
whose demand will spur a more services-based
urban economy. More inclusive growth
and more equitable distribution of income
will reinforce the shift toward consumption,
because lower-income earners consume more
of their income than higher-income earners.
A new model of urbanization requires a
different role for government. Government
should support rather than supplant market
forces in shaping China’s urban landscape,
allowing China’s cities to grow more organi-cally
and efficiently in response to market
forces within the context of the government’s
strategic development plan. Government
would need to rebalance its involvement from
exercising administrative control to regulating
the market-based allocation of people, land,
and capital across China and the provision
of public services to support these alloca-tions.
At the same time, a growing number
of people will be exposed to environmen-tal
hazards, and government would need to
increase its effectiveness in enforcing existing
legislation while enhancing market pricing to
reflect environmental externalities in market
transactions. The reform strategy underpin-ning
this new role would focus on four areas:
better policies on land, including creation of
the institutions in which more market pricing
for land can take place; removal of obstacles
to people’s mobility, including reforms of the
hukou system and provision of a minimum
public services package across China; a fis-cal
and financial strategy that will make the
new model of urbanization affordable; and a
change in the incentives for local government
officials to pursue the goals of the new urban-ization
model.
The main benefit of reforms will be higher-quality
growth. The reforms proposed in this
report—specifically regarding land, hukou,
and fiscal system reforms, and a change in
the incentives for local governments to attract
investment—will make the allocation of
land, capital, and labor more market based.
That in turn will change the distribution of
economic activities across China’s urban
landscape. Accelerating the shift of industrial
activities to cities where land and labor are
cheaper would provide a stronger economic
basis for those cities, and therefore promote
small and medium-size cities. At the same
time, this shift in industrial activities would
also reduce migration pressures for the largest
cities that would increasingly specialize
in high-value services and innovation and
attract higher-skilled labor rather than a low-skilled
industrial workforce.
Land reforms would improve the efficiency
of rural and urban land use and increase the
compensation rural residents receive from
land conversion, thus improving the distribu-tion
of income and wealth. Land reforms will
also likely lead to denser cities, which would
reduce the energy intensity and car use in

24.
e x e c uti v e sum m a r y xxv
cities, thus improving environmental sustain-ability.
And reduced land use for urbaniza-tion
would leave more land for environmen-tal
services and agricultural production.
Hukou reforms and supporting reforms
in public services would increase the mobil-ity
of workers across China and added to
their productivity and wages. It would also
accelerate rural-urban migration, which
combined with land reforms, would acceler-ate
agricultural modernization and increase
rural incomes, thereby reducing rural-urban
income inequalities. More equal service deliv-ery
across China would expand the equality
of opportunity for all China’s citizens. Bet-ter
access to housing finance for migrants
would allow them to acquire urban property
and benefit from capital gains, thus reducing
growing wealth disparities.
Fiscal reforms would generate the revenues
to finance a minimum package of services
across China and reduce the need for land-based
financing, while limiting the risk to the
financial system resulting from unregulated
borrowing by local governments. Fiscal and
financial reforms would also exert more dis-cipline
on local governments, thereby reduc-ing
the wasteful development of ghost towns
and empty industrial parks.
Six priorities for establishing a new urban-ization
model emerge from this study.
First, reforming land management and
institutions. More efficient land use, denser
cities, modernization of agriculture, and bet-ter
income and wealth distribution between
rural and urban areas all require more effi-cient
and equitable utilization of land. A
critical element of reforms is the current
land system, which can be improved by bet-ter
protecting land rights and optimizing
the use of land resources in rural and urban
areas. Land rights could be better protected
by: (1) legalizing the central policy of “long
term without change” for farmland leases
and specifying the nature of the contractual
rights to farmland, including the rights to
occupy, use, profit from, transfer, mortgage,
and bequest land; (2) improving land title
registration by enforcing written land leases,
establishing a register for land titles and land
transactions. Over time, a unified land regis-tration
system based on unified rules, stan-dards,
and procedures applicable to all land
should be established; (3) reforming collec-tive
ownership by codifying that collective
assets belong to the collective’s members,
clarifying membership and qualifications for
entering and terminating collective member-ship,
and defining rights to collective assets,
including the rights to occupy, use, profit,
transfer, withdraw with compensation, mort-gage,
guarantee, and bequest an inheritance
of those rights; and (4) defining “public inter-est”
for which the government can exercise
its eminent domain power, while unifying the
principles and standards for rural and urban
land expropriation.
Rural and urban land use could be further
optimized by (1) allocating rural land in a
more market-driven way. In line with land-use
plans and regulations, government could
clarify equal market entry of collective and
state construction land, while the collective
construction land that has already entered
into the urban market needs to be classified
accordingly and integrated into urban mas-ter
plans and managed according to the law;
(2) integrating urban villages into the formal
urban development process and allowing
the use of rural collective construction land
in peri-urban areas for urban development
within the framework of urban master plans;
(3) shifting land use from industry toward
services and residential use, increasing trans-parency
in the secondary land-market trans-actions,
and boosting the availability of land
for low-income housing from vacant govern-ment
land and consolidated urban village
land; and (4) pricing of industrial land in
line with competing uses to improve the use
of this land and strengthen local government
finances.
Second, reforming the hukou system to
­create
a mobile and versatile labor force
with equal access to a common standard of
public services. To achieve this, the house-hold
registration system would need to move
from an origin-based to a residence-based

25.
xxvi u r b a n c h i n a
system. The hukou system and residency
system can operate in parallel. A residency
registration would provide access to services
such as education, health care, welfare, and
affordable housing, whereas hukou could be
maintained to provide land rights. As land
reforms and pension reforms progress, this
balance could be adjusted in the future. Cen-tral
government needs to define the rules for
establishing residency and a framework for
extending access of new residents to urban
services. Initially, local variations in levels of
access and the timeframe in which new resi-dents
gain full access to services may be nec-essary,
but standards for residency should be
gradually unified across China. The first pri-ority
is to enable migrants and their families
to better integrate into urban society and pro-vide
them with the social services they need—
which would likely require a central fiscal
subsidy to those cities that host a large share
of migrants. In the medium term, reforms in
social services and the public finance system
could allow a nationwide common service
standard, irrespective of location. Sustain-ability
and portability of pension benefits are
of particular importance and would require
central administration over time. Further
developing a fiscal system based on expendi-ture
needs and revenue capacity would lay the
foundation for equal access to a minimum
level of public services across China.
Third, placing urban finances on a more
sustainable footing while creating financial
discipline for local governments. China’s
fiscal system has served the country well
since the major reforms of 1994, but further
reforms will be required to meet the public
service demands from new urban residents
and lower revenues from land financing as
excessive land conversion is phased out and
compensation standards improve. For local
governments to make optimal choices when
using scarce resources, reforms in the fiscal
and financial systems should impose hard
budget constraints on them. There are four
priorities for reforms:
• Improve the revenue base of local gov-ernments
by mainstreaming a property
tax on housing—gradually phased in to
allow people to adjust—to provide local
governments with a stable, sustainable
source of finance linked to land prices;
charging higher prices for urban services
such as water, energy, and transport to
cover full costs and promote efficient use
of resources; and increasing taxes and
charges on motor vehicles to raise revenues
and reduce congestion. China could also
consider reassigning some consumption
taxes to local government—possibly while
maintaining central collection. Irrespective
of the policy choice on local revenues, at
the margin China’s cities must be financed
from local taxes so that local government
decisions will be scrutinized by those that
pay the taxes and benefit from public
services.
• Improve the intergovernmental grants
system. In 2013, China had some 200 dif-ferent
earmarked grant programs, each
meeting separate objectives. Consolidating
these in a limited number of sectoral block
grants could make the system more effec-tive
in the short run. In the medium term,
moving to a general grants system that
considers revenue capacity and expenditure
needs (including a measure for the number
of residents) would ensure that money fol-lows
people and would enable local gov-ernments
to provide a minimum level of
public services for all citizens. Central gov-ernment
would also need to develop stan-dards
for the subprovincial fiscal system,
where large fiscal inequalities remain.
• Establish an explicit framework for local
government borrowing. Allowing local
governments to borrow requires a well-defined
central government framework,
which should include rules that define
which local governments can borrow, from
whom they can borrow, and the conditions
under which they can do so, and which,
at least initially, puts limits on borrowing
for individual municipalities and for local
governments as a whole. The regulatory
framework should also include a cred-ible
no-bailout commitment by the central
government and clear rules of debt work-out
in case a local government becomes

26.
e x e c uti v e sum m a r y xxvii
overindebted. Nonviable local government
financing vehicles (LGFVs) should be reab-sorbed
within the local administration,
and overindebted governments and LGFVs
restructured to regain financial viability.
• Reform the financial sector to enhance
fiscal discipline of local governments. In
other countries, market discipline alone
has regularly failed to limit local borrow-ing,
so China would need to regulate the
bond market, banks, and shadow banks on
equal footing to ensure local government
discipline and competitive access to finance
without undue risk to the financial system.
For the local government bonds market to
function well, local governments would
have to abide by independent creditworthi-ness
assessments and rules on disclosure of
financial statements, requirements that are
already common for banks and enterprises.
In the short term, bank finance will remain
important, however, and to ensure that
local government borrowing does not risk
banks’ stability, legal and regulatory limi-tations
already in place should be enforced.
These include exposure limits, which cap
a bank’s loan exposure to a single cli-ent;
concentration limits, which restrict a
bank’s exposure to a certain type of cli-ent,
such as all local governments taken
together; and insider lending limits, which
limit lending to the owners or co-owners
of the bank. After experiencing widespread
subnational defaults, countries such as Bra-zil
banned subnational ownership of finan-cial
institutions.
Fourth, reforming urban planning and
design. Global experience shows that urban-ization
has led to a diversity of viable and
livable cities, different in size, location, and
population density, but well connected at
the national level and clustered at the local
and regional levels. Rather than prescribing
city size, policies that create a level playing
field can encourage scale and agglomeration
economies across cities to emerge. China
would benefit from replacing the current
standards-driven master planning with
more dynamic approaches based on sound
economic strategies for cities. Within cities,
flexible zoning that promotes smaller plots
and greater mixed-land use would allow
for denser and more efficient development.
China could make better use of existing
urban land by rezoning excess industrial land
into commercial and residential land; raising
floor area ratios (the ratio of a building’s floor
area to the land on which it sits); integrating
urban villages into urban planning; and link-ing
transport infrastructure with urban cen-ters.
Finally, promoting coordination among
cities in metropolitan areas and city clusters
would enhance agglomeration benefits and
encourage better management of congestion
and pollution.
Fifth, managing environmental pressures.
China already has an impressive set of envi-ronmental
laws, regulations, and standards,
and many technical solutions to address pol-lution
and increase resource use efficiency
have been piloted and some mainstreamed
for many years. Improvements will therefore
come with a strengthening of the institutions,
incentives, and instruments that enable effec-tive
enforcement across sectors and at an
appropriate geographic scale. An intergov-ernmental
transfer mechanism to compen-sate
for environmental compensation could
be considered. Management of water and air
quality, the latter especially in large urban
clusters, would be most effectively conducted
at a regional scale. An improved data collec-tion
system with wider information dissemi-nation
would promote monitoring and com-pliance
and allow greater public participation
in holding polluters to account. The legal sys-tem
could be better leveraged to complement
government enforcement by expanding and
formalizing current experiments with envi-ronmental
courts. Furthermore, rebalancing
environmental policy instruments toward
more market-based tools such as taxes and
trading systems for carbon, air, and water
pollution, and energy use would create a
greener urban environment.
Sixth, improving governance at the local
level. The performance evaluation system
of local officials could be adjusted to give
greater weight to variables that will drive

27.
xxviii u r b a n c h i n a
a more efficient, inclusive, and sustainable
urbanization. Local governments’ incentives
to attract industries would need to be mod-erated
by national rules to ensure that local
actions promote national goals. Improving
local government financial management and
transparency could contribute to more effi-cient
and sustainable urbanization through
the introduction of a medium-term expen-diture
framework, comprehensive budgets
that include all government fiscal funds, and
disclosure of full financial accounts including
a local government balance sheet. Establish-ment
of a chief financial officer for each local
government would ensure clear accountabil-ity
for financial management and local bor-rowing.
Finally, new governance structures
for metropolitan areas could realize agglom-eration
benefits and manage externalities.
Many administrative models exist in other
countries and could be tested in China. They
range from loose organization, with objec-tives
restricted to one sector or fully inte-grated
across all local government planning
and services to more formal arrangements,
such as the Kreis in Germany or the metro-politan
area councils in a variety of countries.
Timing, sequencing, and monitoring. The
policy agenda proposed in this report is a
comprehensive one, and authorities will need
to set priorities. Perhaps the most urgent is
the land agenda: once cities have expanded in
an inefficient way, it is hard to reverse. While
government prepares for stronger property
rights for farmers, it may wish to tighten
land conversion and make more efficient
use of existing urban land. Second, govern-ment
would need to focus on local borrow-ing
of all kinds, first and foremost to assess
whether the situation requires urgent action,
as has already been done through the recently
completed audit of local debt by the National
Audit Office. Rules for debt resolution will
have to be issued and applied, especially
regarding instituting a system of property
taxation, a source of stable revenue. Formal
access to borrowing will have to wait until
a full regulatory framework is in place, and
preferably after local government revenue
sources have been strengthened. A decision
on a temporary fiscal subsidy for integrat-ing
migrants would accelerate the implemen-tation
of a residency system and could be
made early on. Finally, market-based con-version
from rural to urban land is likely to
require more experimentation before it can
be mainstreamed nationwide. Other systemic
changes in the policy areas discussed could
come later, but presenting a comprehensive
plan for implementing the agenda and estab-lishing
a monitoring mechanism for follow-up
would lend credibility to the urbanization
agenda.

32.
u r b a n C h i n a 3
Over the past three decades, China has expe-rienced
record growth that has lifted 500
million people out of poverty. Growth was
triggered by reforms and opening up, which
caused a rapid transformation of the economy
that allowed people to move out of agricul-ture
to more productive activities. Rapid eco-nomic
development was facilitated by urban-ization
that created a supportive environment
for growth with abundant labor, cheap land,
and good infrastructure. Local officials keen
to attract industry and investment and to
create employment played an important role
in this transformation. Despite the speed of
urbanization, China avoided some of the
common ills of urbanization, notably urban
unemployment, urban poverty, and squa-lor.
In 1978, less than 20 percent of China’s
population lived in cities; now the share is
more than half. On the basis of the country’s
per capita income, China’s urbanization is
projected to reach about 70 percent—some
1 billion people—by 2030. How China will
manage the next wave of urbanization will
be an important determinant of the country’s
success in meeting its evolving development
objectives.
China is now an upper-middle-income
country, well positioned to become a high-income
country. China’s leadership has rec-ognized
that achieving this goal requires a
new growth model that is more balanced, is
based on productivity increases and innova-tions,
is more equitable in the distribution of
the benefits of growth, and produces more
sustainable environmental outcomes. These
objectives are well reflected in the 12th Five-
Year Plan. Urbanization has an important
role to play: urban areas, if well managed,
provide efficient factor markets that support
continued transformation and productiv-ity
increases through agglomeration effects,
allow innovation and new ideas to emerge,
spur domestic demand from a rising middle
class, give the services sector space to grow,
and save energy, land, and natural resources.
Such efficient, inclusive, and sustainable
urbanization would contribute to China’s
development goals.
Ef f icient urbanizat ion makes the
best possible use of China’s productive
resources—its people, land, and capital.
Higher efficiency—or productivity—would
increase the welfare of China’s people; more
growth would be achieved with the same
work effort, land use, and capital accumu-lation.
Reforms could increase efficiency by
removing barriers that prevent optimal use
of China’s productive resources.
Inclusive urbanization provides all peo-ple
access to equal opportunity to benefit
from urbanization—to use their labor where
they are most productive, to accumulate
assets and savings, and to use public services
of similar quality across China. Reforms
could promote inclusion by integrating rural
migrants in cities, providing them and their
familities with social services comparable to
those of urban hokou holders, while ensur-ing
that rural areas are not left behind in
terms of public service access and quality.
Sustainable urbanization means urban-ization
that can be supported by China’s
environment (land, air, water) and natural
resources, while providing an urban qual-ity
of life commensurate with the desires
of China’s people. Reforms that improve
the urban environment, balance conflicting
demand on land and water, and minimize
the use of natural resources would contrib-ute
to sustainable urbanization.
This overview report analyzes how China
can make its urbanization more efficient,
inclusive, and sustainable. In the first sec-tion,
“Achievements and Emerging Chal-lenges,”
chapters 1 through 4, analyze
China’s achievements in urbanization and
the challenges it faces in achieving effi-cient,
inclusive, and sustainable urbaniza-tion.
In the second section, “The Reform
Introduction

33.
4 U r b a n C h i n a
Agenda,” a comprehensive reform agenda is
proposed. Chapter 5 lays out the vision for
urban China in 2030 and the reform pack-age
that will be needed to achieve it. It also
describes the urban landscape in 2030 under
the reform scenario. Chapters 6 through 10
provide a detailed set of recommendations
in the key areas of reform. Finally, chap-ter
11 proposes the sequencing and timing
of reforms. This report is complemented by
seven supporting reports—Urbanization and
Economic Growth; Planning and Connect-ing
Cities for Greater Diversity and Livabil-ity;
Inclusive Urbanization and Rural-Urban
Integration; China’s Urbanization and Land:
A Framework for Reform; China’s Urbaniza-tion
and Food Security; Financing Urbaniza-tion;
and Green Urbanization—that further
deepen the analysis and expand on the policy
recommendations.

34.
Achievements and
Emerging Challenges
5 10 15 20 25 30 35 40 45 50
u r b a n C h i n a 5
Chapter 1 China’s Urbanization Achievements
China’s urbanization over the past three
decades has been rapid. China’s urban popula-tion
rose from less than 20 percent of the total
in 1978 to 52 percent in 2012, an increase
of more than 500 million people. Although
China’s urbanization is without precedent in
absolute numbers, the increase in its urbaniza-tion
rate has not been exceptional when com-pared
to other countries (figure O.1). In fact,
China’s change in urbanization rate has been
lower than that of countries such as Japan
and the Republic of Korea at comparable
stages of development, but higher than that
of the United States and the United Kingdom
in the past. Moreover, despite rapid urban-ization,
the share of the population that is
urban remains below that expected at ­China’s
current per capita income. Most important,
­China’s
urbanization remains incomplete:
some 260 million residents of urban areas,
known as migrants, lack urban hukou, the
urban registration that regulates access to
urban public services and social security.
Over the past decade, China’s cities have
gained an additional 100 million urban
residents, and the annual growth rate of
the urban population reached almost 4
percent, five times that of the total popu-lation.
Some 40 percent of the new urban
residents became urban because a nearby
city expanded to encompass the rural area
in which they were living, while a similar
share moved to the cities to seek work.1 Pop-ulation
growth in the largest cities has been
especially rapid, despite government policies
intended to encourage migration to small
and medium cities.
Rapid urbanization has facilitated an
unprecedented economic transformation in
the past 30 years, which catalyzed China’s
brisk GDP growth and pulled more than
500 million people out of poverty, many of
whom participated in China’s massive rural-urban
migration, moving from the country-side
to the cities and from agriculture into
jobs in industry and services. China’s average
FIGURE O.1 China’s rapid urbanization from an international
perspectivea
0
Korea, Rep. (1960–90)
Saudi Arabia (1960–90)
Japan (1950–80)
Angola
Haiti
Malaysia
China
Algeria
Indonesia
Brazil (1960–90)
Turkey
Canada (1880–1910)
Bolivia
Mexico (1960–90)
Nigeria
Ghana
Ecuador
Germany (1880–1910)
Russian Federation (1960–90)
Iran, Islamic Rep.
Spain (1960–90)
Netherlands
Mozambique
Portugal
United States (1880–1910)
United Kingdom (1850–80)
Average for developing countries
% increase in urban share of the population
Source: World Bank staff calculations based on World Development Indicators and Bairoch and
Goertz (1986).
Note: It should be noted that the urbanization rates on which this figure is based are not
fully comparable, as definitions of urban areas differ from country to country.
a. The time period for all countries is 1978–2012, unless otherwise noted.

35.
6 U r b a n C h i n a
GDP growth rate over the past three decades
reached nearly 10 percent, and urban areas
that provided cheap land, abundant labor
from migrants, and expanding infrastructure
catalyzed this rapid growth. Demand from a
growing world economy, into which China
increasingly integrated, outpaced domestic
demand, while investment in manufacturing
and infrastructure transformed China’s eco-nomic
geography.
A key driver of China’s success was the
decentralization of decision making to local
governments, which started in 1980. This
decentralization encouraged local experimen-tation
and competition for resources between
cities and motivated local initiatives through
a performance system that rewarded local
leaders’ success against national development
goals. In the transformation process, employ-ment
in manufacturing and services grew
during the same period from less than 30 per-cent
of the labor force to more than 60 per-cent.
Reallocation of labor to manufacturing
and services—sectors that rapidly increased
their productivity—accounted for almost a
fifth of China’s GDP growth. Reallocation of
capital and labor to the more efficient non-state
sectors further boosted the productivity
of China’s economy.
China’s cities have largely avoided the
social ills of rapid urbanization such as wide-spread
urban unemployment and poverty.
Many countries have urbanized in the course
of development, but some have seen their cit-ies
expand without much growth, and in such
cases, urbanization has been accompanied by
rising unemployment, slums, congestion, and
squalor. China has avoided these problems,
in part by regulating the flow of people to its
cities, but more so by creating the conditions
for rapid growth in income and employment.
Mobile migrant labor that was temporar-ily
employed either moved back to the rural
areas or on to the next job, thus containing
open urban unemployment.
China is embarking on a new model of
urbanization with conditions that are vastly
different from three decades ago. China is
reaching a stage in its development in which
efficient use of resources is becoming more
important for growth than simply mobiliz-ing
resources. In the future, the services sec-tor—
rather than industry—is going to play a
larger role in growth, and domestic demand
is likely to grow faster than external demand.
China’s cities today are much larger and far
better connected to the rest of the world
and to one another because of the massive
investment in infrastructure. This is a strong
basis for continued growth, because it allows
agglomeration effects and specialization to
be the drivers of future growth. It is also a
motivator for improved policies that build on
these conditions.

36.
o v e r v i e w 7
Chapter 2 Efficiency
Rapid urbanization has facilitated an unprec-edented
economic transformation in China
over the past 30 years. However, China’s
existing growth model is running out of
steam because of its inefficient use of capital,
labor, and land. These inefficiencies result
from administrative obstacles to labor mobil-ity
and from incentives that have caused local
governments to become overly reliant on cap-ital
accumulation and land conversion. For
China’s urbanization to be more efficient, its
factors of production need to be used more
productively, and city agglomeration and
specialization need to be exploited. These
actions will accelerate urbanization, make
it more conducive to growth, and indirectly
contribute to higher consumption.
Urbanization and agglomeration
Urbanization is generally associated with
higher income and productivity levels. Inter-national
experience suggests that, done well,
urbanization can be an important driver of
productivity increases and growth because
urban areas offer positive agglomeration
effects, including larger, more efficient labor
markets, lower transaction costs, and easier
knowledge spillovers. Agglomeration effects
can also occur in smaller cities with suffi-cient
specialization and transport linkages to
larger urban areas. In the absence of sound
public policy, however, those agglomeration
effects may be easily outweighed by conges-tion
costs—pollution, traffic congestion, and
higher costs of living.
In member countries of the Organisation
for Economic Co-operation and Develop-ment
(OECD), regions with a higher share
of urban population are generally linked to
a per capita GDP higher than the national
average; a 3.5–8 percent increase in total
factor productivity can be expected for
every doubling of the size of a city-region. A
recent survey concludes that such phenom-ena
are not limited to OECD countries,2
and indeed agglomeration economies apply
equally strongly in developing countries.
Estimates for China suggest a 10 percent
increase in productivity for every doubling
of city size.
Market forces are already starting to
“right-size” China’s cities for economic effi-ciency
as China’s rapid growth and migra-tion
have made urban economic systems
more efficient through higher concentration
of production. Furthermore, experience from
Japan, Korea, and the United States, suggests
that China’s large cities will move from their
current concentration of industry toward a
higher concentration of services and that in
the future the innovation and service econ-omy
will be even more concentrated than the
industrial one has been. Indeed, concentra-tion
of services is already taking place across
China’s large cities. For example, between
2000 and 2010, finance, insurance, and real
estate services grew almost 2 percentage
points more in metropolitan than in nonmet-ropolitan
cities. But these tradable services
are still much less concentrated than global
norms would suggest.
A key feature of China’s urbanization has
been the rapid growth and concentration of
economic activity in large cities with high
access to international markets. Cities with
a population of 2.5 million or more gener-ate
95 percent of China’s urban exports. The
combined economies of Beijing, Guangzhou,
Shanghai, Shenzhen, and Tianjin amounted
to $1 trillion in 2010—comparable in size to
Korea’s economy. Incomes in these cities have
climbed swiftly as well: between 2000 and
2010, per capita GDP rose from RMB 35,000
to RMB 82,000 in Shenzhen and from RMB
32,000 to RMB 66,000 in Shanghai. Rising
prosperity in large cities has attracted mil-lions
of people from the countryside. Between
2000 and 2005, migration from other prov-inces
boosted population numbers by 6.6
percent annually in Beijing and by 9.1 percent
in Shanghai. Economic concentration is still
substantially lower than in the United States,
where the largest 10 metropolitan areas
account for about 38 percent of GDP, com-pared
with only half as much in China.
On the policy implications of agglom-eration
effects, the international literature

37.
8 U r b a n C h i n a
is careful to emphasize that policy should
not favor any city. In fact, policies that are
“spatially neutral” seem preferable.3 Gov-ernments
should create a level playing field
among cities to encourage firms and individu-als
to locate where they are most productive.
The existence of agglomeration economies on
their own does not imply favoring big cities,4
and because density has downsides, the ben-efits
must be weighed against the costs.
Agglomeration effects will become more
important for China as the economy shifts
increasingly to services. In China’s richer cit-ies,
services will become more important as
a share of GDP. Agglomeration effects play
an even more important role in services than
in industry. In the United Kingdom, finan-cial
and insurance services are 35 times more
concentrated than manufacturing is (and
information and communications 7 times
more concentrated).5 Close proximity also
stimulates the growth of other specialized
services such as legal, software, data process-ing,
advertising, and management consulting
firms. Urban density allows frequent face-to-
face contact among employees, entrepre-neurs,
and financiers—contact that in turn
promotes innovation and productivity.6
As services become concentrated in cit-ies,
industry will spread out—from a few
big cities to a larger number of small ones.
For example, as service employment grew in
U.S. metropolitan areas during 1972–2000,
industry moved to the suburbs 20–70 kilo-meters
away.7 Aiding this decentralization
were transport infrastructure investments,
which made trade cheaper. Similarly, after
Korea made massive investments in trans-port
and communications infrastructure in
the early 1980s, industry decentralized from
the three largest cities to smaller cities and the
hinterlands.8
Inefficient capital use
China’s growth has become increasingly reli-ant
on capital accumulation in recent years,
especially after the global financial crisis to
which China responded with an investment-driven
economic stimulus. China’s invest-ment
rate is now more than 45 percent of
GDP, constitutes almost half of demand, and
over the past decade accounted for 80 percent
of growth. At the same time, the growth divi-dends
from reallocating factors of produc-tion
across sectors—and across ownership
forms—have declined considerably. Further,
the share of growth that can be attributed to
productivity growth not associated with fac-tor
reallocation declined from 2.5 percent
of GDP in 1991–2000 to just 0.3 percent in
2001–10 (figure O.2).
Other Asian economies that grew rapidly
in the past—Japan, Korea, Singapore, and
Taiwan, China—all relied on high invest-ment
over an extended period of time to
reach high income, and China’s capital stock
per capita still remains significantly lower
than in advanced economies, so much capi-tal
still needs to be accumulated. But contin-ued
capital accumulation will contribute less
and less to growth as the ratio of capital to
labor rises. China’s investment rate, at over
45 percent of GDP, is also exceptionally high.
Moreover, the efficiency with which China
is accumulating capital is declining. China’s
incremental capital-output ratio (ICOR), an
indicator of how much investment is needed
for each additional unit of growth, deterio-rated
from an average of 3.6 in 1991–2011 to
4.7 in 2009–11, in the aftermath of the global
financial crisis. That is considerably higher
than in Japan, Korea, and Taiwan, China in
their high growth years (table O.1), although
comparable to other large emerging econo-mies
after the global financial crisis, a period
during which most economies experienced a
deterioration of their investment efficiency. If
China’s investment efficiency (as measured
by ICOR) had stayed constant from 2000 to
2012, the same growth rate could have been
achieved in 2012 with over 20 percent less
investment.
At the city level, investment efficiency has
also declined. The ICORs have increased
consistently across all city size categories in
China, although returns on capital remain
higher in the larger cities than in smaller
ones. International experience suggests
that capital use is efficient when ICORs are
around 3, meaning that cities would need
capital formation of around 30 percent of
GDP to achieve 10 percent growth. Actual
capital investments in China’s cities have

38.
o v e r v i e w 9
FIGURE O.2 Productive gains from reallocating labor and capital
are almost exhausted
Percentage
11.5
Contribution to China’s economic growth, 1981–2010
9.5
7.5
5.5
3.5
1.5
–0.5
1981–90 1991–2000 2001–10
Capital accumulation
Labor accumulation
Sectoral capital reallocation
Ownership capital reallocation
Sectoral labor reallocation
Ownership labor reallocation
Total factor productivity
Source: Based on research by David Bulman and Aart Kraay for this study.
been at twice that level.9 Across cities, capital
is used least efficiently in smaller cities and
inefficiencies are increasing over time. ICORs
across city types have risen from the 2–3
range in 1995–2001 to well over 4 in 2009–
11; cities with fewer than 500,000 people
had average ICORs above 5.5 over the latter
period.10 On the ground, this inefficiency is
tangible: in some instances, government-led
developments of “new towns” have turned
into wasteful “ghost towns” unlinked from
market demand, while in others the excessive
infrastructure developed cannot be main-tained
from limited budget resources.
Two main reasons explain this overuse of
capital at the city level. Local governments
eager to attract investments have provided
subsidies in the form of inexpensive land,
subsidized utilities, and tax reductions. Also,
China’s financial sector has provided inex-pensive
credit for those who have access—in
part because deposit rates are controlled and
in recent years because the economic stimu-lus
led to a rapid expansion of credit.
Local government debt has become a key
issue. To attract investment and jobs, local
governments have heavily invested in infra-structure.
Despite strict limits on local gov-ernment
borrowing in the Budget Law, local
governments have used urban development
and infrastructure corporations (UDICs) and
local government financing vehicles (LGFVs)
to raise financing for infrastructure develop-ment.
According to the 2013 audit by the
National Audit Office, at end-June 2013,
local governments’ direct debt amounted to
RMB 10.89 trillion, local government guar-antees
RMB 2.67 trillion, and other local
government contingent debt RMB 4.34
trillion. If only explicit debt is taken into
account, China’s general government debt-to-
GDP ratio at the end of 2012 was 36.7 per-cent,
very modest by comparison with OECD
countries. If all contingent debts are included,
the debt-to-GDP ratio would be 53.5 percent,
still modest by international comparison,
more so if one considers that China’s govern-ment
also owns considerable assets, such as
state-owned enterprises. While the level of
debt stock is manageable, the growth of local
government debts, at a yearly rate of around
20 percent in 2010–13, is a major concern,
and some subnational governments may be
Table O.1 Returns on capital are declining over time: China compared with Japan, Korea, and Taiwan, China
Gross fixed capital formation
(percentage of GDP) Average annual GDP growth (%) Incremental capital-output ratio
China (1991–2011) 36.7 10.4 3.6
China (2009–11) 45.4 9.6 4.7
China 2012 46.1 7.8 5.4
Japan (1961–70) 32.6 10.2 3.2
Korea, Rep. (1981–90) 29.6 9.2 3.2
Taiwan, China (1981–90) 21.9 8.0 2.7
Source: Urbanization study team based on CEIC Data (n.d.).

39.
10 U r b a n C h i n a
overindebted. In addition to the risk to the
financial system, the opaque manner in which
local governments borrow de facto is likely
to raise the cost of borrowing because of the
ambiguous status of debt and uncertainty
about whether local governments would back
their financing vehicles. Land has played an
important role as collateral for borrowing by
UDICs and LGFVs, thus linking the health of
local finances to land prices and real estate
development.
Incomplete migration
Despite China’s impressive urbanization and
migration record, the country is still less
urbanized than expected at its level of income.
Moreover, while 38 percent of China’s labor
force still works in agriculture, rapidly rising
migrant wages in cities and shortages of low-skilled
labor suggest that fewer people than
before—and fewer than warranted on eco-nomic
grounds—choose to leave the country-side
to move to the city. International experi-ence
suggests that when workers are able to
move freely across cities and sectors in search
of better opportunities, wages and productiv-ity
should converge across localities. Data for
prefecture-level cities in China in 2010 show
that differences between marginal productiv-ity
and real wages persist and are greatest in
midsize cities, suggesting that labor mobility
is less than optimal.
Migrant workers are an increasingly
important part of the labor force, becoming
better educated, older, and keen to stay in the
city in which they work.11 Migrant workers
made up more than one-third of the labor
force in 2012. Two-thirds of China’s migrant
workers live in the eastern provinces and
two-thirds of these originate from the same
province. City-to-city migration is gaining
in importance: it made up almost 14 percent
of the total in 1990, but more than 22 per-cent
in 2010. The majority of migrant work-ers
are male, and on average they are better
educated than the general rural labor force.
Wages for migrants are rising rapidly, and
the wage differential between migrant work-ers
and their urban counterparts for similar
work performed has fallen over time. The
average migrant worker stays in the city for
only seven to nine years, and only 20 per-cent
of migrants have brought their families,
although more than 50 percent would like to
settle in urban areas.
While there are demographic and other
reasons that explain a slowdown in migra-tion,
the key reasons are administrative: the
hukou system and its link to entitlement of
public services in the city and right to land
in rural areas; lack of portability of social
security; and insufficient low-income hous-ing.
In an economic sense, these administra-tive
barriers work like an expensive tax on
migration; based on current productivity
differences between agriculture and urban
occupations in industry or services, every 1
percent more migration from rural to urban
areas would yield 1.2 percent more GDP.12
At the current level of mechanization, agri-cultural
surplus labor is estimated to be 105
million people,13 and this could increase as
China’s agricultural modernization acceler-ates.
If China’s migration rates had matched
those of Korea’s in the past, China’s economy
would be nearly 25 percent larger today.14
Inefficient land use
Urbanization has used land inefficiently.
Rural land requisition and conversion for
industrial use has been particularly inef-ficient
because it has been largely driven by
administrative decisions rather than market
demand. The incentives for local government
to expand the city rather than develop exist-ing
underused urban land are strong: requi-sition
of rural land and sale for commercial
and residential purposes yield a large wind-fall
gain for the city finances. In contrast,
requisition of urban land is more expensive
and cumbersome, because urban residents
and enterprises have stronger property rights.
Furthermore, national regulations that pro-tect
farmland from conversion have the unin-tended
consequence of fragmenting the urban
periphery because available land for conver-sion
is often not adjacent to the core city.
The territorial expansion of cities has far
outpaced population growth—according to
some estimates, average population density in
China’s cities has dropped by more than 25
percent in the last decade.15 In 2000, China’s

40.
o v e r v i e w 11
urban land was about 99,000 square kilo-meters,
or 1 percent of China’s surface area;
by 2010, it had increased to 127,000 square
kilometers, an average growth of 2.5 percent
a year. China is not alone in this trend toward
less dense cities—many OECD countries
have experienced similar drops in density in
the past 50 years, driven by suburbanization,
increased mobility, and growing demand
for urban space. But many cities in OECD
countries are now aiming to turn this trend
around. There are good reasons for doing so:
agglomeration effects are larger in denser cit-ies;
providing services and infrastructure to a
more compact population costs less; and less
of the land that is crucial to support agricul-tural
production and environmental sustain-ability
is lost.
Within China’s cities, land allocation is
biased toward industry. Unlike commercial
and residential land, industrial land is rarely
auctioned and is usually directly allocated or
sold at heavily subsidized prices, on average
only 10 percent of commercial land prices. As
a result, despite the abundance of urban land,
land for residential development and the ser-vices
sector is limited and expensive, result-ing
in surging housing prices and an under­developed
services sector.
The current regulatory approach to city
land use contributes to inefficient urban
development. Overly strict limits on floor area
ratios (FARs, the ratio of the floor area of a
building to the area of the land the building
sits on) in central urban areas also lead cities
to accommodate new demand by expanding
outward. Moreover, planning controls are
regulated at the superblock level, rather than
the small building plot level, and any peti-tion
for land use or density changes—which
are rarely given, barring exceptional circum-stances—
occur at the original lot level. While
the law provides options for developers to
transfer, mortgage, and lease land use rights
to individual citizens and organizations, con-ventional
land subdivision and sale, as prac-ticed
in many countries around the world, is
not possible in China.
In rural areas, land remains underused.
China’s rural land remains fragmented,16
with the average farm size, at 0.6 hectares,
now smaller than at the start of reforms.
Moreover, more than 60 percent of plots
are less than 0.1 hectares.17 The 2003 Rural
Contracting Law allows subleases of farm-land,
but despite increases in land transfers
in recent years, farmland consolidation has
remained slow, in part because property
rights remain unclear. International evidence
suggests that stronger property rights bring
significant increases in agricultural invest-ment
and productivity through mechani-zation
and increases in rural plot size. For
instance, in the decade after Taiwan, China,
privatized rural land in the 1950s, annual
rice yields rose 60 percent and farm incomes
increased 150 percent.
In Vietnam, new laws passed in 1993
increased both efficiency and equity by
establishing the right to inherit, transfer,
sell, lease, or mortgage land, while extend-ing
the duration of land use rights from 20
to 50 years. Rental market participation qua-drupled
in the five years following reform,
and land sale transactions increased seven-fold.
These changes unambiguously boosted
productivity, helping Vietnam transform
itself from a net rice importer to the world’s
second-largest rice exporter.18 Similarly, in
the United States—where the number of
farms has declined since 1900 by 63 per-cent,
but the average farm size has risen by
67 percent—the period of most rapid transi-tion
(1950–90) saw even faster productivity
growth in agriculture than in manufacturing.
Existing urban land can accommodate a
great deal of future urbanization. Some of
China’s larger cities, including Beijing and
Shanghai, have already started to redensify
in the past decade—with population densities
up by 50 percent in the core of Beijing. How-ever,
there is considerable scope for further
densification: if Guangzhou had the same
density as Seoul, Korea, it could accommo-date
4.2 million additional inhabitants on its
existing land, while Shenzhen could accom-modate
an additional 5.3 million inhabit-ants
(figure O.3). China currently uses more
than a quarter of its urban land for industrial
purposes, even in some of its largest cities—
a stark contrast with Seoul, which uses 7
percent and with Hong Kong SAR, China,
which uses 5 percent. As China grows richer,
conversion of industrial land into commercial

41.
12 U r b a n C h i n a
FIGURE O.3 Guangzhou could accommodate 4.2 million more
people with Seoul’s density profile
and residential land could provide the main
land resource for cities—and provide a new
source of revenues for local governments.
In addition, development of urban villages
and redevelopment of existing urban space
at higher FARs can all contribute to densi-fication
without further expansion of urban
land.
Land pricing will play an important role
in the densification of cities. For China’s 35
largest cities, rapid increases in urban land
prices correlated with greater increases in
density; that is, low land prices lead to urban
sprawl.19 In recent years, the intensity of land
development in coastal cities has increased—
by more than 40 percent in Guangzhou and
Shenzen. Those cities recognized the unsus-tainability
of reliance on rural land for urban
expansion. They implemented institutional
innovations to encourage greater use of exist-ing
urban land, which has led to less sprawl
and more efficient land use. National reforms
along these lines would improve land use
throughout the country.
Land sales revenues have been fluctuat-ing
and declining drastically in some years.
At their peak in 2010, gross revenues totaled
7.5 percent of GDP; however, net of com-pensation
and the cost of land preparation,
land revenues are more modest and have
declined from 4.2 percent of GDP in 2010 to
1.2 percent in 2012 (figure O.4). Compensa-tion
for land taking, including cost for land
requisition, resettlement, and demolition
explains part of the decline: from barely 0.5
percent of GDP in 2008, or 15 percent of
gross revenues, these payments grew to 2.6
percent of GDP in 2012, or almost half of
gross revenues. Further, some land revenues
are earmarked for specific spending catego-ries,
including agricultural infrastructure
and water conservancy, compulsory educa-tion,
and social housing, thus reducing the
use of land revenues for urban construction
purposes.
China’s urbanization has led to large
gains in efficiency through reallocation of
labor from rural to urban activities, and
agglomeration effects have increased the pro-ductivity
of China’s cities. At the same time,
China’s growth could use capital, labor, and
land more efficiently. Removing barriers to
migration, reducing the incentives for local
government to convert rural into urban land,
and making financial sector reforms that
instill more discipline on local governments
and investors alike are key directions for
reform.
Density (inhabitants/km2)
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0 100 200 300 400 500 600
Built-up area (km2)
0
Guangzhou, China
Seoul, Korea
Source: Salat 2013.
Note: The dark blue line indicates the potential for redensification in the densest 600 km­2
of
Guangzhou.
FIGURE O.4 Gross land revenues are large, but
net revenues are declining
% GDP
8
7
6
5
4
3
2
0
2008
2009 2010 2011 2012
Gross revenues
Compensation for land acquisition
Net revenues
1
Sources: MOF data (annual budget reports); China Ministry of Land
and Resources; CEIC Data; World Bank and DRC staff estimates.

42.
o v e r v i e w 13
Urbanization and domestic
demand
Can urbanization help rebalance demand?
This is a key question for China, which
seeks a more balanced pattern of demand,
including a shift from external to domestic
demand and from investment to consump-tion,
because the existing model, while highly
effective in the past, may not be a sustainable
growth strategy going forward. The global
environment has changed: labor costs are ris-ing,
and exports can no longer be counted on
to drive demand growth. Although consumer
demand in China has been growing rapidly
by international standards, it has continued
to lag behind China’s phenomenal growth.
At some 35 percent of GDP, the trend has
been downward on the back of a dwindling
wage share in the economy and rising house-hold
savings (figure O.5).
Several factors can explain the low con-sumption
share in GDP. First, statistics may
underestimate the share of consumption in
GDP. In particular, the share of housing ser-vices
may be underestimated because the
imputed rent depends on the value of housing,
which in urban areas has increased rapidly.
Further, the consumption of other services
may also be underestimated, because this sec-tor
has grown rapidly in the past decade. Sec-ond,
the share of labor remuneration in GDP
has fallen precipitously in recent decades,
declining by 7 percentage points of GDP over
2000–09. In part, this drop can be explained
by the shift of labor from agriculture to indus-try
and services: in agriculture, labor remu-neration
accounts for some 90 percent of
value added, whereas in industry and services,
it is about half that.20 As more people move
out of agriculture, the share of labor in GDP
declines, even though people increase their
wages by moving. Third, household savings
rates increased—accounting for 4 percentage
points of the decline of consumption as a share
of GDP over 2000–09. While the increase
in the savings rate is associated with urban-ization,
the driving factor is income: savings
increase because people save more as income
increases, and people who move to cities earn
more than those in rural areas.
FIGURE O.5 Consumption share and GDP per capita, select East
Asian countries
Consumption share (%)
90
80
70
60
50
40
30
20
10
0 5,000 10,000 15,000 20,000 25,000 35,000
GDP per capita (constant 2005 $ PPP)
0
China (1970–2011)
The low share of consumption in the econ-omy
is reflected in the size of China’s ser-vices
sector, which remains relatively under­developed
by international standards—47.8
percent of GDP in 2011—although it is simi-lar
to levels Japan, Korea, and Taiwan, China
experienced when their urbanization rates
were around 50 percent (figure O.6).
Urbanization can be an indirect driver
of consumption growth. China’s consump-tion
has been growing rapidly in the past
30 years, averaging about 8 percent a year,
but it has still lagged behind China’s record
growth, and as a result, consumption as a
share of GDP has declined. The largest driver
behind a rise in China’s consumption rate is
likely to be the share of household income in
GDP. This share declined from 68.5 percent
in 1990 to 60.4 percent in 2011, while over
the same period the wage share in the econ-omy
declined even more rapidly to 47 percent
in 2011—accounting for most of the decline
in consumption as a share of GDP. One rea-son
for this decline is the move of labor from
agriculture, with a high share of labor in
value-added industry, which is more capital
30,000
Korea, Rep. (1960–2011)
Japan (1950–2010)
Taiwan, China (1952–2010)
Sources: World Bank World Development Indicators and authors’ calculations.

43.
14 U r b a n C h i n a
FIGURE O.6 Services and urbanization in East Asia
intensive. The other is the abundance of sur-plus
labor that kept wage pressures low.
Because the labor share in services is
higher than in industry, a shift of production
is likely to increase the wage share in the
economy. In addition, continued urbaniza-tion
is likely to exhaust surplus labor in the
coming decade, which in turn will accelerate
wage increases that will drive up consump-tion.
Real wage increases have already been
brisk in recent years, especially for skilled
labor but also increasingly for the unskilled
labor usually provided by migrants. Accel-erating
urbanization by removing obstacles
to migration could bring forward the point
where wage increases start to outpace GDP
growth. At that stage, China’s consumption
share in the economy is likely to increase.
In other economies that experienced rapid
development in the past (Japan, Korea, and
Taiwan, China), the consumption share in
the economy bottomed out at per capita
incomes between $10,000 and $15,000, an
income level China will reach this decade
if it maintains relatively rapid growth.21
Changing consumption patterns of migrants
in China’s cities are unlikely to directly
drive increases in consumption. Although
migrants consume far less as a share of
their income than urban residents in the
location they work, the overall savings rate
for migrants and their families back home
hardly differs from those with urban hukou
at similar levels of income. Thus, extend-ing
urban hukou rights to migrants by itself
would not increase consumption. Savings
rates rise rapidly with income: the richest 10
percent of the population has a savings rate
above 60 percent, whereas the poorest 10
percent saves very little.22 Part of the drop in
consumption as a share of income reflects the
higher incomes China’s people enjoy now.
At the same time, this finding would imply
that more inclusive growth that benefits the
lower-income strata—whether migrant or
not—could increase the consumption share
of GDP. Accelerating rural-urban migration
would benefit those lower-income earners,
and they will consume more. As a share of
their increased income, they would still con-sume
less, and thus national consumption as
a share of GDP is not likely to rise.
As China’s cities expand rapidly, urban
investment demand has been high. Invest-ment
in infrastructure has topped 10 percent
of GDP in the past decade, while urban con-struction
has been peaking at 3.5 percent of
GDP in 2008–12. Urban construction invest-ment
per additional citizen rose sharply in
the past three decades—from RMB 294 per
additional urban resident in 1980 to RMB
64,000 in 2007—in part driven by the ris-ing
costs of land and labor.23 Arguably, rapid
growth in infrastructure investment is unsus-tainable
and will moderate in the future for
three reasons: more efficient, denser cities
that are shifting into services will require less
additional investment in infrastructure; much
of the necessary basic infrastructure has been
built already, and additions to the urban
population will require less additional invest-ment
than in the past; and maintenance of
infrastructure is taking an increasing share of
local government budgets, which will become
a constraint on additional capital investment.
While demand for housing is likely to
remain strong, urban real estate investment
is already very high at 16 percent of GDP, up
from 9 percent a decade ago. It is unlikely to
Services value added (% GDP)
80
70
60
40
10
0 10 20 40 60 80 100
Urban population (% total)
0
China (1978–2011)
50
30
20
30 50 70 90
Japan (1955–2011)
Taiwan, China (1962–2009)
Korea, Rep. (1965–2011)
Sources: Data from World Bank World Development Indicators; Council for Economic Planning
and Development (Taiwan), various years; Statistics Bureau of the Japan Ministry of Internal
Affairs and Communications, various years.

44.
o v e r v i e w 15
grow much further as a share of GDP: first,
a projected urbanization rate of 70 percent
by 2030 implies a slowdown in urbanization
compared with the past 2 decades. Second, in
recent years this investment has been driven
by rapid credit growth that may not be sus-tainable.
Finally, the stock of empty housing
is growing, while the supply of low-income
housing falls short of demand, despite the
government’s ambitious social housing
investment of 2 percent of GDP per year.
Thus, whereas the composition of real estate
investment may change, it is unlikely to grow
more rapidly than GDP in the coming years.

45.
16 U r b a n C h i n a
Chapter 3 Inclusion
China has achieved a remarkable transforma-tion
with the movement of over 260 million
migrants from rural to urban areas. These
individuals have left their agricultural jobs
to seize the opportunities offered by urban-ization
and to take up more productive
and higher paying jobs in cities. Through
this process, China has managed to sustain
high wage growth and even higher produc-tivity
growth and to reduce poverty on an
unprecedented scale. At the same time, Chi-na’s
spatial and rural-urban inequality has
grown, and social tensions have emerged as
a result of the rapid conversion of rural land
at below-market value and the incomplete
integration of migrants into China’s cities.
Barriers to labor mobility remain, largely
because social security and other benefits are
not portable: those who migrate are often
forced to leave their families behind in rural
areas where access to quality services such as
education and health may be limited. Social
policy reforms in the household registration
system, public finance, service delivery, and
labor market institutions will be needed to
reduce these social challenges and make Chi-na’s
urbanization more inclusive.
China’s growing inequality and
social tensions
China’s rapid urbanization has been accom-panied
by growing income and wealth
inequality. China’s Gini coefficient, a mea-sure
of inequality, stands at 0.47 according
to official data, while unofficial estimates put
this number even higher. Although not excep-tional
by international standards (figure O.7),
inequality has risen rapidly in the past three
decades and is high compared with other
East Asian and OECD countries. Income
inequalities have been rising in urban as well
as rural areas, and the gap between urban
and rural incomes is as high as it was at the
start of reforms in 1978. Within urban areas,
inequalities between migrant workers and the
population with urban hukou remain. Even
though migrant wages have been catching
up and migrants are increasingly paid wages
comparable to those of urban residents doing
similar work, migrants often lack the skills
and educational background for higher-wage
jobs. Inequality from capital income is on the
rise as well, and inequality in wealth among
the urban population—much of it driven by
house ownership—is also rising. As is usual
in other countries, assets are even more con-centrated
than income, and in China this
concentration is very high: the top 10 percent
of households is estimated to own 85 per-cent
of assets, whereas they earn 57 percent
of total income.24 This places China’s wealth
inequality near the top by international com-parison.
25 For the median urban household,
housing constitutes the main asset.
China’s barriers to migration explain in
part the persistence of regional and urban-rural
wage gaps, and they indicate inefficiency
in the use of labor. International experience
suggests that increased mobility is likely to
reduce spatial and rural-urban inequality.
Consider the United States, where mobility
has nearly eliminated interregional and rural-urban
wage differences: rural-urban migra-tion
helped to equalize agricultural and non-agricultural
wages, with a disproportionate
FIGURE O.7 China’s rising inequality
Gini coecient
80
70
60
40
10
5 6 7 9 10 12
Log of real GDP per capita (constant 2005 international $, PPP)
0
Source: World Bank staff calculations; Milanovic 2013.
Note: PPP = purchasing power parity.
China
50
30
20
8 11
Other countries

46.
o v e r v i e w 17
effect on poorer agricultural states.26 The
result was regional convergence, with the
north-south labor-income ratio falling from
2.4 to 1.1, while the urbanization rate rose
from 28 to 74 percent. Evidence from Korea
also shows that free rural-urban migration
reduced inequality. By 1994, three decades
into reform, Korea’s urban-rural wage gap
had disappeared entirely—indicating that
workers had migrated to their optimal loca-tions.
27 In China, the interprovincial gap in
wages continues to grow, but interprovincial
migration nonetheless lags behind that of the
United States, where wage differences among
states are much lower.28
Social tensions in urban and rural areas
are growing. The absorption of 260 million
migrants into China’s cities has not always
been smooth, and urban hukou holders expe-rience
a crowding of public services and per-ceive
a decline in service quality because of
the rapid growth in urban population. Mean-while,
discontent among farmers who feel
unfairly treated because of the low level of
compensation they received for expropriated
land is one of the main causes of social unrest
in China, especially in peri-urban areas at the
city fringe. From 1990 to 2010, local gov-ernments
expropriated rural land at an esti-mated
RMB 2 trillion below market value.29
Assuming that this compensation would have
generated returns similar to overall growth,
farmers today would have more than RMB
5 trillion in household wealth—greatly low-ering
asset inequality and leading to greater
consumption through a wealth effect.
Labor disputes nearly doubled between
2005 and 2012 and largely involved migrant
workers. The three most common reasons
for labor disputes are wages and compensa-tion,
social insurance, and contract termina-tions.
30 Labor disputes are becoming more
complex, more difficult to resolve in a timely
fashion, and more likely to have an impact on
public opinion and social stability.
The dispute resolution system in China is
organized to settle “rights” disputes but not
“interest” disputes. Rights disputes involve
statutory or contractual claims, while inter-est
disputes are conflicts over interests
(such as wages, work conditions, and work
organization) that do not allege violations
of minimum legal standards or contractual
obligations. As Chinese workers’ conscious-ness
of protections under the labor markets
has increased, so too has the number of inter-est
disputes, but the institutional vacuum for
resolving them may explain in part why col-lective
work actions such as strikes and dem-onstrations
have increased in recent years.
While some demonstrations are clearly about
legal violations (such as the failure to pay
wages), many other demonstrations occur
because workers wish to highlight disagree-ments
and tensions with employers that are a
normal part of industrial relations.
Higher demand has intensified competition
for urban services, creating tensions between
long-term urban residents and newcomers.31
Therefore, keeping the quality of provision at
a level acceptable to the long-term residents
is important. At the same time, the delivery
of social services in urban areas can build on
the natural “technological advantages” of
cities—economies of scale in service provi-sion
and increasing returns to scale. Urban-ization
also offers greater potential for
agglomeration of service providers and thus
potentially an enhanced choice for clients.
The evolution of the hukou
system
Hukou reform has been undertaken gradually
since the early 1980s in response to China’s
evolving economic and social transformation.
Significantly, the mobility restriction func-tion
of hukou has largely been eliminated. In
2006, the State Council promulgated a mile-stone
document that provided a comprehen-sive
policy framework for the treatment of
rural migrant workers in cities with respect
to their entitlement to social services. This
document explicitly linked access to services
with the goal of facilitating integration of
migrants into cities. Since then, as required
by the central government, reforms have been
explored and promoted at the local level.
Some provinces started pilots that adopted
parallel residence permits and the provision
of social services linked to these permits.

47.
18 U r b a n C h i n a
Several large cities and provinces, such as
Chengdu, Chongqing, Guangdong, Jiangsu,
Shanghai, Shenzhen, and Zhejiang, have
adopted the residence permit system—some
with strict limitations. In 2011, the State
Council announced hukou reform as a key
component of a coordinated set of urban
and rural reforms and took several steps
including issuing hukou system reform guide-lines
linked to a city’s administrative level,
requesting institutions to improve registra-tion
of temporary populations in the cities,
and calling for a gradual rollout of the resi-dence
permit system.32
For migrants from outside municipal or
provincial jurisdictions, local reforms have
been the least complete in large cities, where
most rural migrants are moving to, attracted
by the higher returns to their labor. On the
other hand, in small and medium cities, social
services and social protection are less devel-oped,
which is one factor that explains the
limited success of the policy aimed at attract-ing
migrants to smaller cities. Reforms in the
larger cities have generally been focused on
selecting migrants with the desired charac-teristics
and are oriented toward attracting
high-skilled and wealthy individuals, thus
significantly limiting the labor market impact
of the reforms and reducing their equity ben-efits.
33 Migration restrictions continue in a
variety of ways, for example, through entry
barriers based on skills, investments, or
income, or through quota rationing.
Reforming hukou to encourage mobility
should be mindful of capacity constraints
in urban public service delivery. These are
already evident for the current migrant popu-lation
but will increase once migrant families
reunite and migration accelerates as access to
urban services increases. The government is
concerned that large additional demands on
services may undermine service quality for
existing urban residents, which could aggra-vate
social tension. A second concern is that
migration will be driven not by opportunities
in the labor market but by access to services.
China has large differences in the quality and
quantity of public services between urban
and rural areas. Internationally, there is not
much evidence of such “benefit migration”
in advanced economies,34 but the differences
in public services quality in those countries
are not as large as in China. Evidence from
China suggests that even for large cities such
as Chengdu, relaxing limitations on access to
services does not lead to an excessive influx of
migrants seeking benefits. Even the advanced
economies regulate access at the local level
(box O.1).
Hukou reforms face financial constraints
to some extent. In principle, money should
follow people—that is, if a family migrated
from a rural to an urban area, the money that
financed their services in the rural area should
be transferred to the city. Over time, the fis-cal
system and the service delivery system
can adjust to accommodate the additional
demand in urban areas. Centralizing some
public services, notably social security, would
help address part of the problem, but a tem-porary
fiscal subsidy to urban areas to rap-idly
increase service delivery capacity may be
needed in the short run to accelerate improve-ments
in service delivery to migrants until the
fiscal system has been adjusted (see chapter 7
and supporting report 6). The benefits from
accelerated migration and the improved stock
of human capital—which accrue nation-wide—
are worth that investment.
Access to urban social services
In the 2000s, the central government required
local governments to include migrant children
in the local education systems, accommodat-ing
them mainly in local public schools. This
requirement represents a dramatic change in
the official policy on the rights of migrant
children. The implementation of the policy
was supported by fiscal resources from both
central and local governments. Yet migrant
children still face difficulties enrolling in
urban public schools—in Guangdong, for
instance, some 50 percent of migrant children
are not in public schools—and many attend
migrant schools, which typically have poor
teaching facilities, undeveloped curricula,
insufficient funding, and less qualified teach-ers.
Barriers that keep migrant children out
of the mainstream education system include
capacity constraints in urban schools, which
were planned for the hukou population
only; legal and regulatory barriers with high

48.
o v e r v i e w 19
BOX O.1 Residency rights in the European Union, the United States, the former
Soviet Union, and Japan
Within the European Union (EU), a “right to reside”
in another EU country beyond three months is
linked to one’s employment status. Workers and self-employed
persons have the right to reside without
any conditions but must have the proper documen-tation
to prove their status, such as a certificate of
employment or proof of self-employment. In the
case of students or “economically inactive” persons
(unemployed or retired, for example), the right to
reside involves proving that they have comprehensive
health insurance as well as “sufficient resources”
to not become a burden on the host EU country’s
social assistance system during their residency. In
addition, students are also required to be enrolled
at an establishment for the principal purpose of fol-lowing
a course of study or vocational training. The
“right to permanent residence” requires five years of
continuous legal residence in the host EU country
and, once acquired, is not subject to the conditions
mentioned above. Some categories, notably work-ers
or self-employed persons, receive more favorable
treatment in this regard and may acquire this right
before five years, under certain conditions. One can
lose the right to permanent residency only through
an absence of more than two consecutive years,
although there are certain stipulated reasons for
which such an absence is acceptable.
In the United States, state residency is required
for a variety of rights, including the right to receive
public services such as education and health, and eli-gibility
to receive public assistance. Broadly speak-ing,
there are two types of residency requirements:
a “bona fide residency requirement,” which simply
requires that the person establish residence before
demanding the services restricted to residents; and a
“durational residency requirement,” which obligates
individuals to show that, in addition to being a bona
fide resident of the state, they have resided there for a
certain stipulated period of time. Attempts by states
to make certain fundamental rights conditional
upon residency have not remained unchallenged in
court, however. Since the 1960s, the Supreme Court
has struck down several attempts by states to impose
residency requirements (particularly durational
ones) on persons applying for welfare, public hous-ing,
and medical services, while upholding the state’s
ability to do so for the right to attend particular pub-lic
schools and gain access to tuition waivers, among
other programs. Residency is determined differently
for different purposes and often varies by state.
In the former Soviet Union, the propiska resi-dence
permit system was adopted for economic, law
enforcement, and other purposes, such as access to
jobs, social benefits, housing and utility payments,
taxes, conscription, medical care, and the like.
Acquiring a propiska to move to a large city, espe-cially
Moscow, was extremely difficult for migrants.
Following the dissolution of the Soviet Union, the
propiska system was officially abolished for the citi-zens
of the Russian Federation, but access to services
remains challenging for the millions of migrants
from former Soviet republics. Some of the former
Soviet republics, such as Belarus and Kyrgyzstan,
chose to keep their propiska systems, or at least a
scaled down version of them, and these present the
most complex challenge to entitlement reform.
In Japan, there are two distinct systems of regis-tries
to manage citizen information: the Basic Resi-dent
Registry (or J¯umi nhy¯o) and the Family Registry
(or Koseki). The J¯umi nhy¯o is essentially a registry
listing current address, basic sociodemographic
information (name, address, date of birth, gender,
head of household, nationality/region from where
they came, status of residency, and the like), together
with information related to social benefits and insur-ance
including national health insurance, medical
insurance for the elderly over age 75, long-term care
insurance, national pension plan, child allowance,
and rice distribution. The Koseki, in contrast, is the
formal record of a family’s (instead of an individual)
history.a Unlike the J¯umi nhy¯o, a Koseki is not nor-mally
used to verify information or required to get
government services. It is similar to the registration
systems in other East Asian countries influenced by
the ancient Chinese system of government, including
China (hukou), Vietnam (Hô. khâ?u), and the Demo-cratic
People’s Republic of Korea (hoju/hojeok/
hojok).
The J¯umi nhy¯o is the basis for the issuance of
basic resident registration cards (j¯umin kihon daich¯o
kaado) by municipalities, and Japanese law requires
every citizen to report his or her current address
(and any changes therein)b to the local authorities,
who compile the information for tax, census, and
various other purposes. More important, J¯umi nhy¯o
is required to access various social services including
(Box continues next page)

49.
20 U r b a n C h i n a
BOX O.1 (continued)
transaction costs because of the documenta-tion
required for enrollment; high school fees;
and the policy requiring students to take the
university and high school entrance examina-tion
in their province of origin.
The disparities in education in urban areas
are also evident among local children from
different social strata. This can be seen in the
differential enrollment rates between higher-quality
“key” schools and regular schools,
and in indicators such as average class size
and transition rates. The increased impor-tance
of family connections and “placement
fees” to get children into elite urban public
schools risks reinforcing existing social dis-parities.
In urban cities such as Beijing and
Shanghai, key elementary and junior high
schools generally use exams to select their
students.
For urban health insurance schemes, the
government has a policy of open enroll-ment,
but employers have few incentives to
enroll migrants because it raises their costs.
The majority of migrants are enrolled in the
New Rural Cooperative Medical Scheme
(NRCMS), which charges lower premiums.
Yet migrants cannot conveniently take advan-tage
of NRCMS benefits when they access
health services in urban areas, because the
benefits are not portable. Enrollees would first
have to pay for care in urban facilities and
then seek reimbursement from the NRCMS
upon visiting their county of residence, usu-ally
during long holidays.35 Few can afford to
wait many months for reimbursement.
Policies to increase access to health ser­vices
need to be matched with measures to
control costs—for the sake of all urban resi­dents,
not only migrants. Between 2007 and
2010, real annual growth in health spend-ing
averaged about 15 percent compared
with annual GDP growth of approximately
8 percent. Health is also consuming a grow-ing
share of public spending as government
registering children at a local school district or start-ing
or renewing national health insurance member-ship.
It basically serves as a proof of residence where
required, such as for opening a bank account or to
apply for government permits. J¯umi nhy¯o registra-tion
is also required to officially register a name seal,
which functions as one’s official signature.
Since 2002, J¯umi nhy¯o information is available
electronically through the Basic Resident Register
Network, run by a government-backed provider in
Tokyo (the Local Authorities Systems Development
Center). The Juki Net is the electronic registration
system currently used by more than 1,700 local gov-
ernments in Japan and has greatly helped to simplify
moving-in/out procedures, obtain a residence reg-istry
card, and eliminate the need to attach a copy
of the resident’s record in various administrative
procedures. It also helps residents acquire an “elec-tronic
certificate” that can be used to authenticate
themselves in electronic applications on the Inter-net.
Since December 2008, it has also eliminated
the need for pensioners to annually confirm benefits
eligibility,c since the Basic Resident Registration
Network System reports directly to the Japan Pen-sion
Service on behalf of the pensioner.
a. Japanese law requires all Japanese households to report births, acknowledgments of paternity, adoptions, disruptions
of adoptions, deaths, marriages, and divorces of Japanese citizens to their local authority, which compiles such records
encompassing all Japanese citizens within their jurisdiction. Marriages, adoptions, and acknowledgments of paternity
become legally effective only when such events are recorded in the Koseki. Any changes to this information have to
be sealed by an official registrar. The Koseki simultaneously fills the function of birth certificates, death certificates,
marriage licenses, and the census in other countries as well as serving as proof of Japanese citizenship.
b. All Japanese residents are required to obtain a move-out notice/certificate from the municipality where they move
from before submitting a move-in notice/certificate to the municipality where they are moving. This helps facilitate the
smooth provision of public services including national health insurance and child allowance and also prevents overlap of
collections of taxes and insurance premiums.
c. The Japan Pension Service requires annual reporting in the pensioner’s birth month to confirm eligibility status and to
continue receiving pension payments, failing which pay outs are suspended.

50.
o v e r v i e w 21
expands insurance systems and invests in
health services to improve access and reduce
out-of-pocket spending.
Pension coverage has dramatically
expanded over the past five years, but the
inclusion of migrant, self-employed, and
informal sector workers remains a chal-lenge.
Further systemic reforms are required
to ensure portability, decent benefits, and
financial sustainability of the system. Start-ing
with rural areas in late 2009, and with
urban areas in July 2011, China began roll-ing
out a nationwide voluntary pension
scheme for urban and rural residents with
a combination of individual accounts and
basic pensions. The “rural resident pension
scheme” and the “urban resident pension
scheme” are innovative efforts to encour-age
participation through public subsidies.
Although migrants cannot participate in
local urban resident pensions, they can con-tribute
to the urban or rural resident pension
scheme in the town where they have local
hukou, and in this way ensure provision for
their old age. The policy framework and fis-cal
subsidy policy of the urban and rural res-ident
pension schemes are well aligned with
each other, and it is anticipated that the two
schemes will be merged shortly.
In 2012, 229.8 million people contrib-uted
to urban employee pension schemes,
while the rural system covered about 460
million people by the end of that year. The
number of migrants who participated in the
urban employee pension scheme increased
from 14.2 million (or 10.8 percent of urban
migrants) in 2006, to 45.6 million (or 27.8
percent) in 2012, but the coverage rate
remained less than half that of urban work-ers.
Several factors explain the low partici-pation
rate of rural migrant workers in the
urban worker pension scheme. These include
lack of enforcement of the Social Insurance
Law of 2011 and the Labor Contract Law of
2009, which require employers to treat urban
and migrant workers equally; high tax and
social contribution rates that are close to the
OECD average, and even exceed it if housing
fund contributions are included; and the lack
of implementation of the State Council’s deci-sion
of 2009 to secure portability of social
insurance rights.
Urban dibao, introduced in 1997 to sup-port
the reform of state-owned enterprises
by providing income assistance for laid-off
workers and their families, has evolved into
a backbone of the social safety net in China.
Dibao is a noncontributory cash transfer pro-gram
that aims to ensure a minimum living
standard for eligible households. Rural dibao
was rolled out nationwide in 2007. By 2012,
urban and rural dibao covered 23.4 million
urban beneficiaries and 53.4 rural beneficia-ries,
accounting for 3.0 percent of urban and
8.3 percent of rural population, respectively.
In addition to the dibao, several other pro-grams
provide poor and low-income fami-lies
with assistance, such as exemptions or
reductions on education fees, subsidies for
health insurance, and subsidized utilities that
provide temporary cash and in-kind sup-port.
In 2012, 20.8 million urban and 59.7
million rural individuals received these sub-sidies.
The rural wubao and urban Three-No
are assistance programs that provide income
and in-kind support to those who have “no
capacity to work, no source of income, and
no legal dependents, or whose legal depen-dent
has no capability to provide support”
in rural and urban areas, respectively. Most
social assistance programs in China target
only households with local hukou—urban or
rural—and migrants and their families are
excluded from the urban programs.
Access to housing
Urban hukou households in China have a
very high rate of homeownership by inter-national
standards. About 84 percent of
families in the cities live in homes they own,
primarily the result of government policies in
the 1990s that allowed occupants of work-unit
housing to purchase homes at heav-ily
discounted prices.36 In contrast, only
10 percent of migrants own their urban
residence, and affordability, rather than resi-dency
status, now constitutes the strongest
barrier to accessing quality housing. Across
urban areas, prices doubled between 1999
and 2010—in some cities like Shanghai and
Beijing, they increased more than fivefold—
making the Chinese housing market unaf-fordable
for many.37 Studies show that in

51.
22 U r b a n C h i n a
BOX O.2 Social Housing
Since 2007, China has implemented an ambitious
social housing program for rural and urban residents.
The program includes 7 categories and 12 varieties
of social housing, including low-cost rental housing,
assisted home ownership, public rental housing, and
shelter improvements. By 2012, these programs had
addressed housing needs of 31 million urban house-holds,
or 12.5 percent of total urban households,
while over 5 million urban households benefited from
rental subsidies. Fiscal support for social housing has
rapidly increased, from RMB 10 billion in 2007 to
RMB 380 billion in 2012. Earmarked grants from
the central government for social housing rose from
RMB 7 billion to RMB 235 billion over the same
period. In addition, tax reductions and exemptions
were granted. The financial sector financing of such
programs also grew rapidly: by 2012, bank loans
had reached RMB 571 billion; enterprise bonds had
raised RMB 226 billion; and loans from public hous-ing
funds amounted to RMB 49 billion. Since 2010,
land use plans for social housing projects have been
listed separately in the annual residential land sup-ply
plan and given priority. Between 2010 and 2012,
land supply for social housing projects across the
country increased from 11,000 hectares to 38,000
hectares.
Despite these achievements, many challenges
remain. The 12th Five-Year Plan targets 35 million
units of social housing, bringing total coverage to 20
percent of households, which is higher than in most
developed countries. Land availability financing,
effective targeting of public subsidies, and operat-ing
and maintenance of housing units are among the
key challenges that China faces in meeting its goals.
Aside from improving the functioning of the housing
market more generally, introducing a property tax on
housing to better utilize existing housing stock, and
encouraging industries to move to more affordable
locations in secondary cities, lessons from interna-tional
experience suggest that China can introduce
specific policies to promote social housing.
Increasing flexibility for municipalities in achiev-ing
their social housing construction goals. Rather
than mandating a specific number of a particular
type of unit, broad goals could be set for each munic-ipality,
which could then be required to develop a
specific plan on how to achieve these targets. The
plan should be done on the basis of careful analy-sis
of housing demand (such as demographic and
socioeconomic conditions) and supply (such as types
of housing available for different income groups, at
what cost). The overall plan would include a market
study, a market plan, a financial plan, an analysis
of job growth and infrastructure needs, and a long-term
management plan including contingencies. The
findings of the analysis should determine the hous-ing
needs of a locality and enable local governments
to define the nature, scope, and policy interventions
required to effectively align housing demand and
supply.
Improving availability of land for social housing.
Promoting mixed-use developments can increase the
availability of social housing throughout a munici-pality.
Planning for housing should bring together
many stakeholders including those involved in plan-ning
for local economic development, transpor-tation,
urban space, and infrastructure services.
“Inclusionary zoning” policies, an instrument used
in many U.S. municipalities and in European coun-tries,
can be applied to require developers to set
aside 10–30 percent of the developments for afford-able
housing. Rezoning industrial land for housing
would increase the availability of land in many cit-ies
and bring down prices, as discussed elsewhere in
this report. Improving the inventory of public land
and identifying underused parcels could expand
the availability of land for social housing develop-ment.
Including “urban villages” in the city and zon-ing
them for low-income housing is another option,
while better connecting existing social housing in
remote locations would improve their usefulness and
occupation.
Improving targeting of social housing subsidies.
Focusing subsidies on low-income households that
are unable to access housing without public assis-tance
can be done by establishing clearly defined
­eligibility
criteria on the basis of housing demand
analysis using refined socioeconomic and demo-graphic
data. Expanding social housing eligibility to
migrants through criteria of the residency system, as
recommended in this report, would improve targeting
for low-income households, because migrants usu-ally
are at the lower end of the income distribution.
Examples of subsidies to households include capital
grants toward home purchase (such as assistance
for a down payment) or rental vouchers. Successful
international examples include a rental assistance
program to low-income households under the Section
8 program in the United States, which provides hous-ing
vouchers or direct payments to private landlords.
(Box continues next page)

52.
o v e r v i e w 23
Given China’s social housing demand, shifting sub-sidies
from ownership to renting may be appropriate
in many locations. Regulations to ensure exit from
low-income housing when households are no longer
eligible also is needed to ensure a steady supply of
low-income housing over time.
Diversifying the supply and management of
low-income housing developments by encouraging
entry of specialized firms and nonprofit organiza-tions.
Specialized firms can bring competition and
innovation to serve the low-income segment. Private
developers elsewhere have managed to specialize in
the social housing sector by bringing down the cost
of construction through innovative construction
methods. Xerbia in India and GEO SAB de CV in
Mexico are good examples. Smaller plots and more
fine-grained zoning, as discussed elsewhere in this
report, would lower the barrier to entry for firms. In
Europe, specialized nonprofit organizations, includ-ing
cooperatives in continental Europe and housing
councils in the United Kingdom, were instrumental
in expanding and managing the low-income hous-ing
stock—often with government support to ensure
their access to finance and membership fees to pro-vide
an equity buffer. International good practice
several large cities such as Guangzhou and
Shanghai, long-term urban residents and
migrants have similar access to housing,38
suggesting that hukou type matters less than
income.
Formal and informal rental markets pro-vide
an important source of housing, and
their importance is likely to grow as mobility
increases. The bulk of low-income housing is
provided outside formally established govern-ment
programs through collective housing
(such as dormitories provided by employers),
or private rental units in “urban villages” or
on the urban fringe. In Shanghai, only 5.5
percent of migrant households can afford to
purchase commercial housing and some 80
percent are renters, while the rest live mainly
in employer-provided dormitories.39 An infor-mal
residential market of so-called “small-property-
rights” housing has grown rapidly,
without legal protection and at odds with
government policy. This is a manifestation of
market forces with distortionary administra-tive
measures. Urban villages offer affordable
housing as well as significant income to mem-bers
of the village collective, many of whom
are dispossessed farmers. At the same time,
since urban villages are not incorporated into
urban master plans, city administrators have
little incentive to extend urban infrastructure
and public services to urban village areas.
Expanding mortgage and housing rental
markets through government insurance
and support could expand homeownership.
China’s overall mortgage lending has grown
rapidly—consumer credit in China has
grown from 1.5 percent of total renminbi
(RMB) lending in 1999 to 13.3 percent in
June 201340—but poor households, and par-ticularly
migrants, lack access to this credit.
Private and public finance could help to make
housing more affordable across China. In
the United States, the establishment of the
Federal Housing Administration created the
BOX O.2 (continued)
calls for government departments to promote special-ized
entities that manage the housing stock, rather
than trying to manage it themselves.
Lowering the cost of low-income housing. Regula-tory
requirements impose high standards on housing
development. Relaxing these would bring down the
cost of affordable housing. When Bangkok was urban-izing,
it allowed developers to adjust building density
levels and unit sizes, making housing relatively afford-able
even in central locations. Improving business
processes such as the issuance of permits can shorten
the time required to complete a building project and
thereby reduce costs. Germany offers an example of
an efficient and streamlined permitting process that
allows developers to build housing fairly quickly.
Controlling contingent liabilities in housing
finance. Many local governments finance their low-income
housing through local government financing
vehicles (LGFVs), some of which are overindebted
because of rapid expansion. Ensuring proper man-agement
of these financing vehicles, clear account-ing
for assets and liabilities, and strict control on the
extent of local government guarantees on LGFV debt
should prevent local government exposure to debt
distress arising from low-income housing.

53.
24 U r b a n C h i n a
conditions for a postwar housing boom that
saw homeownership rise from 44 percent of
households in 1940 to 62 percent in 1960.
Providing services to those who
stay behind
In China, services in urban areas are easier to
access and are of better quality than in rural
areas. Notwithstanding the actions needed in
urban areas, there will continue to be a need
to provide quality rural services for those who
remain in rural areas; otherwise rural dwell-ers
will move to the cities to access the bet-ter
social services there, rather than to pursue
more productive economic opportunities.41
Needs, resources, goals, and social values
differ widely throughout China. All residents
of a city should be given equal services, but
residents of different cities and rural areas
may be given different services, and it will
be important for the government to build
on existing policies to address this issue.
In rural education, for example, respond-ing
to demographic trends and outmigra-tion,
the Ministry of Education launched an
aggressive School Merger Policy in 1999.42
According to the policy, education officials
closed down small, remote schools and
focused their attention on improving the
teaching and facilities in larger, centralized
schools. Boarding schools became important
providers of education services in response to
the increase in commuting time among rural
children. The emphasis in rural schools now
is on continuing the improvement in recruit-ment
and retention of qualified teachers.
In rural health, the focus is on the pri-mary
care system, which is institution-ally
and financially fragmented and needs
strengthening. The system has a host of
often uncoordinated actors, including fam-ily
planning agencies, maternal child health
programs, township health centers for pri-mary
and secondary care, village doctors,
public health agencies, and others. Funding
sources for primary care are also varied and
include earmarked vertical program budgets,
health insurance, central and local budgets,
and user fees. Coordinating these programs
and improving the quality of the workforce
and their incentives is key, while access to
secondary and tertiary medical facilities,
when needed, should be facilitated by por-table
health insurance policies.

54.
o v e r v i e w 25
China’s impressive economic and social gains
have come at the price of significant environ-mental
degradation and increased resource
use. The current urbanization path is not effi-cient
because pollution imposes rising direct
and indirect economic costs that are often
not reflected in market transactions. Urban
sprawl is leading to, for instance, greater
energy use for transport and higher costs for
energy and water supply infrastructure than
in denser cities. Current trends are also not
socially inclusive because—while pollution
and resource scarcity affect all citizens—the
poor are usually most heavily affected and
least able to cope. Some also fear that the
increased demand from a growing urban
population for water and land could under-mine
China’s food security and lead to unac-ceptably
high imports of key products, which
could in turn drive up global prices.
China’s environmental performance is of
global importance. China is now the larg-est
emitter of greenhouse gases in the world,
and in the decade up to 2010, growth in
greenhouse gas emissions has accelerated
(table O.2). That was a result mainly of a
slowdown in the reduction of energy inten-sity
in the economy, which fell by a remark-able
6 percent a year on average from 1980
to 2000, a rate that slowed to 2 percent in
2000–10. Beijing, Shanghai, and Tianjin
have estimated per capita emissions com-parable
to large European and some North
American cities.43
In recent decades China has invested heav-ily
in infrastructure to support environmen-tal
management and has made considerable
progress in reducing pollution and improving
the energy efficiency of its economy. Rapid
economic growth has continued to outpace
China’s ability to control pollution from
existing and emerging sources, however, and
more needs to be done. Moreover, there is
an urgent need to prepare the groundwork
for future urbanization to be conducted
more sustainably than in the past. How
China’s cities develop in the future—either
as compact dense cities or as large sprawling
metropolises—will determine the magnitude
of their carbon footprint and their exposure
to pollution. Decisions made today will affect
China’s cities and the quality of life of its
urban residents for generations to come.
As China reaches upper-middle- and high-income
status, citizens will increasingly
demand and expect a clean environment and
livable cities, and proactive action is urgently
needed. Toward these ends, China should
consider environmental sustainability as a
policy goal with the same weight as economic
efficiency and social inclusion.
Raising the profile—and the effective-ness—
of environmentally sustainable poli-cies
in China’s future urbanization requires
that China’s green governance match its
green ambitions. China has introduced a
comprehensive set of environmental laws and
regulations, but these have not brought the
expected improvements in environmental
quality because incentives to enforce environ-mental
policies and complete complementary
sector reforms have been lacking. Moreover,
sustainability needs to be tackled at the scale
in which pollution impacts are felt, which for
many resources, such as air, means crossing
traditional administrative boundaries and
finding regional solutions.
The cost of pollution in
China’s cities
As China prepares for the next wave of
urbanization, addressing environmental and
resource constraints will become increas-ingly
more urgent because much of China’s
pollution is concentrated in its cities, and as
China’s urban population grows, a greater
Chapter 4 Sustainability
Table O.2 China’s carbon emissions and drivers of growth
Average annual percentage change
1980–2000 2001–10
Carbon emissions 4.8 10.1
GDP growth 10.1 10.8
Energy-to-GDP intensity –5.9 –2.1
Carbon-to-energy intensity 1.2 1.5
Source: World Bank World Development Indicators database.

55.
26 U r b a n C h i n a
FIGURE O.8 Air pollution declined over time . . . but the costs of
air pollution have been rising. Particulate matter pollution and
estimated health damages in urban China, 2004–10
m3
Micrograms/number of its citizens are exposed to pol-lution
that threatens their health and well-being.
The economic and social costs of this
exposure are already severe and rising.
Estimates of mortality from air pollution
in China are significant. Although average
annual concentrations of particulate mat-ter
(PM) fell 25 percent between 2004 and
102010 (figure O.8), mortality rates have been
increasing, in large part because 200 mil-lion
more people now live in cities compared
with a decade ago. High mortality levels and
other health damages have high economic
costs, estimated to range from $100 billion to
more than $300 billion a year. Moreover, the
evidence from other countries suggests there
may be a long-term impact for the coun-try
because small children and infants are
severely affected by air pollution, which leads
not only to higher rates of infant mortality,
but also birth defects and impaired cognitive
functions.44
Energy production is a key source of air
but only 7 percent of its freshwater, water
pollution in China’s cities owing to China’s
scarcity and quality are major problems for
dependence on coal, which has remained at
sustainable urban development in China—if
around 70 percent of total energy supply in
not the most pressing. Nationwide, the gap
the last decade. Cities host coal-reliant indus-tries,
between urban water demand and supply is
which make up a large share of China’s
6 billion cubic meters a year. Some 420 cities
economic structure. Coal use has remained
have insufficient water supplies; 110 of these
largely stable or even increased in some cities.
are facing severe water shortages.48 The
Total emissions grew in this period, although
problem is most urgent in the north, where concerted efforts have been made to control
particulate matter and sulfur oxides.
Water pollution, increasingly from live-stock
and poultry operations and other non-point
agricultural sources resulting from
extensive use of pesticides and chemical
fertilizers, domestic sewage, and industrial
point sources, contributes to China’s rising
digestive cancer rates (Ebenstein 2012). The
Ministry of Environmental Protection (MEP)
reported that 57 percent of the groundwa-ter
in 198 cities in 2012 was rated “bad” or
“extremely bad,” while more than 30 percent
of the country’s major rivers were found to
be “polluted” or “seriously polluted,” mak-ing
their waters unfit for drinking or direct
human contact.45 Municipal and industrial
solid waste generation increased from about
1.2 billion to 2.6 billion tons between 2003
and 2010.
Urbanization strains
China’s resources
Since 1978, total energy use in China
increased 6 times to fuel an economy that
increased 18 times and an urban population
that more than doubled in size.46 Moreover,
the rate with which energy use increased was
unprecedented and difficult to predict. By
2005, China had already reached energy con-sumption
levels projected only six years earlier
for 2020.47 Despite significant efforts, total
carbon emissions continue to rise. Although
subsidies have been reduced in the energy sec-tor,
some cross subsidies favoring residential
consumers continue to discourage end-use
efficiency. While these trends are alarming,
there are some positive notes as well. China’s
economy has become more energy efficient,
with energy intensity falling by an average of
4.7 percent a year.
With 20 percent of the world’s population
120
110
100
80
2004 2008 2010
Damages from mortality
and morbidity (right axis)
90
RMB, billions (constant 2000 RMB)
800
700
600
500
2006
PM10 concentrations
(left axis)
Source: Renmin University, n.d. based on China Environmental Yearbooks and World Bank
estimates.
Note: PM10 = fine suspended particulates less than 10 microns in diameter, population
weighted city averages.

56.
o v e r v i e w 27
two-thirds of the cities reportedly face water
shortages. Water pollution has exacerbated
water scarcity, intensifying competition for
water resources. The response has been to
increase supply by digging deeper wells and
building reservoirs or diversion infrastruc-ture,
steps that create an array of ecological
risks from the loss of river flows, and that are
no more than stopgap measures in the face
of ever-growing demand. Low tariffs for
urban water supply and wastewater reduce
the incentives for demand savings and limit
the financial sustainability of service provi-sion.
Only about 44 percent of urban water
utilities generated positive net margins, and
only 10 percent of better performing utilities
generated net margins above 10 percent.49
China’s urbanization has consumed sig-nificant
land resources as urban boundaries
are continuously shifted outward and ter-ritorial
jurisdictions of cities are expanded,
primarily through the expropriation of sur-rounding
rural land and its integration into
urban areas. Between 2001 and 2011, the
amount of land in China classified as urban
construction land increased by 17,600 square
kilometers, reaching a total area of 41,805
square kilometers in 2011, an increase of 58
percent over the decade (figure O.9). About
90 percent of the demand for urban construc-tion
land was met through the expropriation
of rural land, while only 10 percent was sup-plied
from the existing stock of undeveloped
urban construction land.
Moreover, only considering land classified
as urban construction land gives a narrow
view of the impact of urbanization on land
resources, because the total rural land requi-sition
and conversion into state-owned urban
land has been significantly higher. From 2005
to 2011, a total of 27,200 square kilometers of
rural land was requisitioned and converted to
state ownership. That is, until 2008, roughly
3,000 square kilometers a year were requi-sitioned.
From 2008 onward, annual rural
land requisition increased sharply to around
4,460 square kilometers. Much of the new
urban land was requisitioned from farmers
at low levels of compensation, often not more
than 15–20 percent of the prices the con-verted
land fetched on the market. Rural land
conversion potentially has implications for
China’s food security (box O.3). As a result
FIGURE O.9 Land requisition is outpacing urban
land use
km2
6,000
5,000
4,000
3,000
2,000
1,000
0
2005
2007 2009 2011
Land requisition (MLRYB)
Urban construction land (UCYB)
Sources: China Ministry of Land and Resources Yearbook; China Min-istry
of Housing and Rural-Urban Development.
of these conversions, the availability of agri-cultural
land is now close to the 1.8 million
mu (120 million hectares), the “red line” that
is considered to be the minimum necessary
to ensure food security. If urbanization con-tinues
to follow current trends, an additional
34,000 square kilometers—an area about the
size of the Netherlands—would be required
to accommodate the growth of cities in the
next decade. If this were to come from agri-cultural
land, the net result would be a drop
in the availability of agricultural land below
the “red line.” A slowdown in land conver-sion
is necessary: cities should become denser
rather than larger, and greater density is also
desirable for reasons of efficiency. Moreover,
rural construction land is still abundant and,
with more rapid migration to cities, could
become the main source of new urban land.
Urban sprawl—with the rapid growth of
low-density areas at the urban periphery—
has led to congestion of transport arteries
and contributed to pollution. Moreover, it
has increased resource use and carbon emis-sions
in three ways: longer commutes and
more private motorized trips have increased
urban transport fuel consumption; larger
living space per person has led to higher per
capita energy use for home heating, cooling,
and power consumption; and infrastructure
has been used less intensively than it would
be in dense urban cores, lowering economies
of scale and increasing the capital, operating,

57.
28 U r b a n C h i n a
BOX O.3 Feeding China’s cities
China’s urbanization is likely to strongly affect two
important aspects of food security: the aggregate
availability of domestically produced food, and the
access of vulnerable individuals and households to
food. Most urban households rely on food purchases;
therefore, low-income households that spend a large
share of their incomes on food can be vulnerable to
increases in the availability and prices of staple foods.
Achieving domestic self-sufficiency in major
food grains has been one of China’s strategic policy
priorities, and as a result, China has had limited
dependence on global food markets to date. China’s
agricultural sector has performed well, shifting
from relatively low-value to higher-value agriculture
products, largely consistent with resource endow-ments
and comparative advantage. Grain yields have
increased continuously since 2003; however, annual
yield growth is diminishing. In 2012, grain output
reached a record yield of 590 million tons. Per capita
grain production reached 425 kilograms, above the
400 kilogram grain security line.
As China becomes more urbanized, it is likely
that it will become more dependent over time on
imports of (especially land-intensive) farm products,
in particular as the comparative advantage of labor-intensive
farming of grains diminishes. International
comparisons reveal striking differences between
countries in the extent to which food imports as
a share of total consumption have evolved. Most
lower-income countries have maintained close to
100 percent self-sufficiency (when rice, wheat,
maize, and soybeans are considered together), but
the ratio has declined sharply in the higher-income
East Asian economies despite protectionist policies
(figure BO.3.1).
The structural changes that are occurring in
China—demographic changes in which rising wage
rates in nonfarm employment are drawing labor from
agriculture, changes in diets and consumption pat-terns,
emergence of environmental supply constraints
(land, water), transformation of rural factor markets,
transformation of food supply chain, market and
distribution systems, and agricultural technology
and farm scale changes—will impact China’s food
production and food availability. Currently, China’s
food production is limited by water scarcity and, to a
lesser extent, the availability of land; however, a new
constraint—labor—is now on the horizon.
As China’s urbanization increases, overall
demand for food is likely to increase because the
demand for higher-cost foods such as fruits, vegeta-
bles, and animal products rises much more rapidly
with income growth than demand for basic food
staples such as rice and wheat. These goods require
much higher levels of intermediate and factor inputs
than basic staples, particularly for livestock prod-ucts
given the inefficiencies of feed conversion. If
Figure BO.3.1 Self-sufficiency ratios for grain in
Asian countries
180
160
140
120
100
80
60
40
20
0
1960 1970
1980 1990 2000 2013
Indonesia
China
Korea
Taiwan, China
Japan
Philippines
Thailand
Bangladesh
India
Source: USDA 2013.
Note: This graph shows the total for rice, wheat, maize, and soybeans.
Figure BO.3.2 Food consumption in energy
equivalents and income
Food consumption
Israel
Italy
Denmark
Canada
17.5 20.0 22.5 25.0 27.5 30.0
(Box continues next page)
2.5
2.0
1.5
1.0
0.5
Zambia
0
Tons of cereal equivalents per capita per year
China
India
2.5
Mexico
High
income
(15%a)
High middle
income
(15%a)
Low
middle
income
(50%a)
Low
income
(20%a)
Brazil
Hungary
World average consumption, 2002 = 0.95
aPercent of world population, 2002
5.0 7.5 10.0 12.5 15.0
Real GDP (PPP) per capita, thousands (2002 US $)
0.0

58.
o v e r v i e w 29
BOX O.3 (continued)
all types of food are converted into a common basis
using food conversion ratios that take into account
the efficiency of conversion of grains into livestock
products, the relationship between real incomes and
food demand depicted in figure BO.3.2 emerges.
FIGURE O.10 Impact of urban density on carbon emissions for transport and infrastructures: road, water, and
wastewater network lengths
a. Transport network b. Water network
0 5,000 10,000
c. Road network d. Wastewater network
0 5,000 10,000
and maintenance costs for infrastructure ser-vices
(figure O.10).
The global context of China’s
urban sustainability
Practically all industrial countries have
passed through a phase of excessive urban
pollution. London’s “great smog” event in
0 5,000 10,000
0 5,000 10,000
1952 may have killed more than 10,000
people over four December days. Smog lev-els
in Los Angeles are down 70 percent from
the 1970s, and high ozone advisory days
dropped from 184 to close to zero. Tokyo’s
campaign for cleaner air centered on the vis-ibility
of Mount Fuji: the mountain could
be seen on only 20 days a year in the 1960s
compared with well over 130 days today.
In all cases, it took a package of regulatory
tCO2 per capita
7
6
5
4
3
2
1
0
15,000 20,000 25,000 30,000
Inhabitants per km2
Meters per capita
7
6
5
4
3
2
1
0
15,000 20,000
Inhabitants per km2
Meters per capita
12
10
8
6
4
2
0
15,000 20,000 25,000
Inhabitants per km2
Meters per capita
16
14
12
10
8
6
2
0
15,000 20,000
Inhabitants per km2
4
Sources: Salat and Bourdic 2013; and Müller and others 2013.
Note: This graph represents a variety of cities in developing and developed countries.
China’s food consumption in cereal equivalents is
currently about 20 percent above the world average
level. More important, demand is likely to grow con-siderably
as China reaches middle- and high-income
status.

59.
30 U r b a n C h i n a
measures implemented over decades to bring
the situation under control.
Given the size of China’s population
and economy, its structure, and the speed
of its development, the country’s environ-mental
problems are on a larger scale than
those experienced by other countries. But
being a late developer also has advantages.
China can benefit from experience and
technology from elsewhere and reduce pol-lution
faster than was possible for earlier
developers. Much of the research on air
pollution sources, impacts, and abatement
options was developed in North America
and Europe over many decades and can
be deployed more quickly and cheaply in
China. Some of the benefits of technology
and management are already apparent, and
China has also produced indigenous solu-tions
that can be shared with countries fac-ing
similar challenges.
Green urbanization in China is of global
interest. Greenhouse gases increase the prob-ability
of global climate change. North Amer-ica
and Europe still exceed China’s cumulative
historical emissions, but, according to data
from the International Energy Agency, Chi-na’s
per capita CO2 emissions from fuel com-bustion
are still rising and are likely to reach
the European Union (EU) average by 2015.
In contrast to experience elsewhere, a large
share of China’s pollution came initially from
the relocation of dirty industries that were
being phased out in developed countries.
One estimate suggests that exports account
for about one-third of China’s energy use and
likely a similar share of air pollution.50 In the
future, by shifting toward a growth model
more reliant on services and consumption,
China will be able to pollute less on behalf of
other countries. On the other hand, similar
shifts in polluting industries also appear to be
replicated within China between coastal and
inland areas.51
Environmental regulations and
governance
Recognizing that resource depletion and pol-lution
have become costly barriers to fur-ther
development, China’s leaders have set
ambitious targets for controlling both. The
comprehensive set of targets, laws, and regu-lations
has not brought the desired improve-ments
in environmental quality because most
environmental policy making has favored nar-row
technical and engineering solutions over
institutional and economic approaches. The
main causes of China’s environmental prob-lems
are institutional rather than technical.
The considerable inertia in China’s envi-ronmental
management can be addressed
through a strengthened accountability and
incentives framework. As a first step, regu-lations
with strong enforcement are needed.
Currently, enforcement of China’s environ-mental
regulations is often weak because
local cadres face inadequate incentives to put
policies into effect and to complete comple-mentary
sector reforms. Even when the regu-lations
are enforced, their implementation is
often inflexible, causing unnecessary costs.
Although, government spending on environ-mental
management has been similar to that
of OECD countries and has increased over
time, spending should be about 0.5 percent
of GDP more than current levels.52
In addition to strengthened enforcement,
China needs to ensure that the pricing of
energy, water, and other resources reflects
the cost of their provision. Moreover, prices
should include the indirect costs imposed on
health, ecosystems, and the climate by the
production of resources and by their use.
Improving urban sustainability requires
a multisector and, in many cases, multijuris-dictional
approach, which is currently under-developed.
Structural shifts in the economy
toward cleaner sectors will help in the longer
term. Greening sector policies require better
coordinated national and local level deci-sions,
often across several agencies. More
comprehensive planning at the city level will
support sector reforms. For instance, urban
sprawl—which raises the cost of public ser-vice
provision and locks in wasteful energy
consumption—can be avoided through inte-grated
urban land use, transport, and energy
planning that reshapes urban form.
In larger urban clusters, air and water
quality management strategies must operate
at a regional scale to account for all relevant
pollution sources and to identify cost-effective

60.
o v e r v i e w 31
regional abatement plans. Building regional
institutions will take time but can be started
with interjurisdictional mechanisms like the
“joint decision-making conference” in the Hai
River Basin. Such mechanisms have been used
in China and have built up the trust needed to
develop interjurisdictional solutions.
The channels for citizen involvement,
including through environmental nongovern-mental
organizations (NGOs) and the legal
system, are still inadequate, in part because
of limited access to information on the per-formance
of environmental management
authorities and polluting activities of firms.
Without green governance—a strengthened
accountability and incentives framework—
China will find it difficult to align its sector
reforms with its green ambitions. The chal-lenges
are daunting but not insurmountable
in the long term, and if addressed, can bring
about cities that are not only great places to
work but also great places to live.

61.
33
The Reform Agenda
Chapter 5 A Strategy for Reform
China’s leaders have called for a new model
of urbanization that would support relatively
high but more efficient growth, share the
benefits of urbanization more widely, and
be environmentally sustainable, while safe-guarding
China’s food security.
A reform package
Achieving the new model of urbanization
requires a comprehensive reform package
centered around four priority areas—land,
hukou, the fiscal system, and the incentive
system for local governments—supported
by the reform of social policies and service
delivery, urban planning, and environmen-tal
management. In all of these areas, China
has already made considerable progress, and
at the local level many ongoing experiments
deserve consideration for mainstreaming.
China can also build on the experience of
other countries that are rapidly urbanizing,
or did so in the past, such as Britain and the
United States in the nineteenth century, and
Germany, Japan, and Korea more recently.
Land policies determine the density and
spatial efficiency of cities, which in turn drive
environmental sustainability and livabil-ity.
Land policies also determine the extent
to which farmers can share in the wealth
unlocked by higher-value use of land, which
could narrow urban-rural income and wealth
disparities. More efficient use of land will
require stronger property rights for farmers,
higher compensation for land requisition,
new mechanisms for converting rural land
to urban uses, more flexible use of existing
urban land through better planning and zon-ing,
and urban land allocation that is driven
by market prices.
Hukou reforms are needed to promote
better use of labor through the removal of
barriers to labor mobility—from rural to
urban areas, but also from city to city. If
people are to move to where they are most
productive rather than to where they can
receive better services, they should expect to
receive similar public services wherever they
are, while retaining their accumulated rights
to social security. To achieve this, the hukou
system would need to evolve into a resi-dency
system with increasingly unified rules
for access to services. Over time, cities and
rural areas alike should be in a position to
deliver at least a minimum standard of public
services to any resident, irrespective of their
place of origin.
The fiscal system needs reform to accom-modate
the proposed changes in the land and
hukou systems. Land has been a large source
of government revenue in the recent decade—
on average, some 5.5 percent of GDP in gross
revenues and 2.5 percent after compensation
and land sale preparation costs. More effi-cient
urbanization will require governments
to focus on better managing existing urban
land rather than acquiring new urban land.
As a result, a reduction in revenue from rural
land conversion is expected. At the same
time, demands on city finances will increase
as local governments provide public services
to migrants and their families. Fiscal reforms
should therefore provide resources for munic-ipalities
to continue to grow, together with
the discipline to grow efficiently.
A stronger local tax base and more regu-lar
and strictly regulated access to borrow-ing
are critical. Rationalization of the distri-bution
of expenditures over different levels
of government—specifically, centralization
of social security finances—would relieve
local budgets of some spending obligations
and enhance labor mobility. Over time, the
intergovernmental fiscal system would have

62.
34 U r b a n C h i n a
to ensure that any local government—rural
or urban—can provide the minimum stan-dard
of services that the central government
seeks and the nation can afford. Local gov-ernment
borrowing, if properly regulated and
monitored, should better match the payment
for capital projects with the life of the infra-structure
asset. The use of informal financ-ing
methods, such as local investment com­panies,
should be reduced.
Changes in land, hukou, and fiscal policies
would need to be underpinned by a change in
the incentive structure for local government
decision makers. The government personnel
system that rewards local leaders’ success
based on national development goals already
includes quality of life indicators in health,
culture, education, and the environment, and
important targets such as birth control and
social stability, but the main focus has con-tinued
to be on the more easily measurable
goal of annual GDP growth. Rebalancing the
evaluation criteria toward social and environ-mental
objectives that match the new model
of urbanization will be necessary for suc-cess.
Further, greater participation of China’s
citizens in the urbanization process would
enhance accountability of local governments
and ensure that policies will be more respon-sive
to local needs, which would minimize
social unrest. In some areas, China has a
relatively mature system of citizen involve-ment;
expanding this participatory approach
across the spectrum of urban policies could
be considered.
The main benefit of reforms will be
higher-quality growth. The reforms proposed
in this report—specifically land, hukou, and
fiscal system reforms, and a change in the
incentives for local governments to attract
investment—will make the allocation of
land, capital, and labor more market based.
That in turn will change the distribution of
economic activities across China’s urban
landscape. Accelerating the shift of industrial
activities to secondary cities where land and
labor are cheaper would provide a stronger
economic basis for those cities and promote
small and medium-size cities. At the same
time, this shift in industrial activities would
also reduce migration pressures on the largest
cities, which would increasingly specialize
in high-value services and innovation and
attract higher-skilled labor rather than a low-skilled
industrial workforce.
Land reforms would improve the effi-ciency
of rural and urban land use and
increase the compensation rural residents
receive from land conversion, thus improving
the distribution of income and wealth. Land
reforms will also likely lead to denser cities,
which would reduce the energy intensity and
car use in cities, thus improving environmen-tal
sustainability. And reduced land use for
urbanization would make more land avail-able
for environmental services and agricul-tural
production.
Hukou reforms and reforms in public ser-vices
would increase the mobility of work-ers
across China and increase their produc-tivity
and wages. It would also accelerate
rural-urban migration, which combined with
land reforms, would accelerate agricultural
modernization and increase rural incomes,
thereby reducing rural-urban income
inequalities. More equal public service deliv-ery
across China would increase equality
of opportunity for all China’s citizens. Bet-ter
access to housing finance for migrants
would allow them to acquire urban property
and benefit from capital gains, thus reducing
growing wealth disparities.
Fiscal reforms would generate the revenues
to finance a minimum package of services
across China and reduce the need for land-based
financing, while limiting the risk to
the financial system resulting from unregu-lated
local government borrowing. Fiscal and
financial reforms would also impose more
discipline on local governments, thereby
reducing the wasteful development of ghost
towns and empty industrial parks.
A vision for China’s new urban
landscape in 2030
China’s initial conditions for the next phase
of urbanization are vastly different from
three decades ago. China is now an upper
middle-income country, the largest manu-facturer
and exporter in the world, and it

63.
o v e r v i e w 35
is on the cusp of a development stage in
which efficient use of resources will be more
important for growth than simply mobiliz-ing
resources. China’s ­cities
today are much
larger than they were 30 years ago, with the
largest rivaling the biggest agglomerations in
the world—including London, New York,
Seoul, and Tokyo. China’s cities are now far
better connected to the rest of the world and
to other cities in China, due in part to a mas-sive
investment in infrastructure in the past
two decades and to a long period of open-ing
up, crowned by entry to the World Trade
Organization (WTO) in 2001. These devel-opments
provide a strong basis for efficient
urbanization, allowing agglomeration effects
and specialization to contribute to productiv-ity
increases and growth.
As China implements the new model of
urbanization, a different urban landscape
will emerge. China will continue to urbanize
rapidly, with urban residents accounting for
almost 70 percent of the population by 2030
in a reform scenario, bringing the country’s
urbanization rate in line with expectations
that are based on its level of income. That
implies, however, that the speed of China’s
urbanization rate will slow in the next two
decades, even though there may be an initial
spurt in urban population soon after reforms
are implemented, as migrant families are
reunited in urban areas. Moreover, income
growth will also likely slow in the next two
decades (table O.3), but it will be slightly
higher, and considerably more balanced, in
a reform scenario compared with business
as usual. The main drivers of more rapid
growth under reforms will be the higher rate
at which people move from rural to urban
areas and among cities, and the higher pro-ductivity
in more efficient cities.
As China’s labor market tightens, con-sumption
is likely to grow faster than
investment because the share of labor in
the economy will rise as wage growth out-paces
productivity growth. This growing
demand includes consumer demand from
an expanding middle class—those that earn
$10–$100 per capita a day (at 2005 inter-nationally
comparable prices). This group
now makes up almost a quarter of China’s
population and more than 40 percent of its
urban population—although its size still lags
behind that in other countries at China’s
current level of GDP.53 Labor scarcity in
rural areas will catalyze land consolidation
and the rapid dissemination of new produc-tion
technologies. That will increase labor
productivity, and wages in rural areas will
thus rise more rapidly than in urban areas,
thereby reducing urban-rural income dis-parities.
With higher incomes, the services
sector is likely to overtake manufacturing as
the main driver of growth, constituting more
than half of GDP by 2030. Urban areas will
create the scale of demand for an increas-ingly
diverse supply of services. The ser-vices
sector’s share in the economy will rise
Table O.3 China’s urbanization scenarios
2010 2030 baseline 2030 reforms
Urbanization rate (percent) 52 66 70
Share of labor force in agriculture (percent) 38 17.1 11.6
GDP (trillions of 2013 US$) 8.5 24.5
GDP (average annual growth past 5 years) 8.3 4.9 5.2
Total factor productivitya (average annual growth over past 5 years) 2.2 2.1 2.5
Consumption share of GDP (percent) 46.5 62.0 66.5
Investment share of GDP (percent) 48.8 35.5 30.9
Secondary industry share of GDP (percent) 48.8 37.2 33.7
Tertiary industry (services) share in the economy (percent) 41.8 58.5 60.6
Urban-rural income disparities (ratio) 3.8 3.3 2.6
Energy consumption per GDP (Tce/RMB 10,000) 1.41 0.73 0.64
Carbon dioxide emission per GDP (ton CO2/RMB 10,000) 3.32 1.68 1.39
Source: Based on DRC CGE Model simulations.
Note: The industry structure is based on input-output tables, hence the structure is slightly different from one reported by the Statistical Yearbook. All data are from
2010, except for the third row (GDP), which is from 2013.
a. Including gains from reallocation of labor and capital across sectors and ownership forms.

64.
36 U r b a n C h i n a
because of higher demand for services and
because productivity increases in services are
likely to lag behind those in manufacturing,
increasing their relative price.
Under the reform scenario, by 2030,
China will display a more diverse landscape
of cities because urbanization will not be
uniform and will reflect the comparative
advantage of individual cities. In China’s
most developed cities, the services sector—
rather than industry—will play a larger role
in growth, because cities are fertile ground
for the development of more sophisticated,
higher value-added services. The largest cit-ies
within urban agglomerations such as Bei-jing,
Guangzhou, and Shanghai have grown
rapidly in recent years, serving as gateways to
international markets, and this trend is likely
to be reinforced by reforms. These agglom-erations
will provide the urban diversity that
encourages learning in universities and busi-ness
districts and that connects people to the
rest of the world.
Secondary cities that are part of metro-politan
areas, especially those in coastal
areas, will increasingly attract land-intensive
manufacturing and will offer producers the
benefits of specialization and low transport
costs near the larger cities with their large
markets and links to international markets.
China’s large inland cities, most of which are
currently outside major development clusters,
possess human capital and amenities that will
serve as a foundation for economic develop-ment.
Easier access to international markets
and reduced freight costs will help these cities
compete with coastal cities. Hinterland cities
and rural towns will allow firms and farms
to exploit plant-level scale economies by pro-viding
roads for moving inputs and outputs
and schools for the families of workers. They
would focus on public service delivery and
preparing people for opportunities elsewhere.
Exactly how this new urban landscape
will take shape is impossible to predict with
certainty, but if international experience is
any guide, China’s largest coastal cities will
continue to grow more rapidly than the aver-age
of all China’s cities, while the popula-tion
share of small cities will likely decline.
Cities of any size that are part of the main
agglomerations are likely to thrive, along with
those connected to these agglomerations. Cit-ies
along China’s main transport corridors
will be particularly well positioned to take
advantage of efficiency gains through special-ization.
International experience as well as
China’s own past suggests that public policy
that fights these trends—which are driven
by the choices of individuals and firms—is
unlikely to succeed. Or, if such policies did
succeed, it would be at the expense of effi-ciency
and income growth.
China can afford its new
urbanization model
China can afford a more efficient, inclusive,
and sustainable urbanization. Simulations
from a detailed model developed for this
study suggest that the overall costs of urban-ization
will gradually decline as a share of
GDP.54 These simulations assume that the
costs of delivering infrastructure and social
services to migrants at urban standards is
additional—in other words, that spending
in rural areas (where the migrants originate)
does not decline as a share of GDP (table
O.4). The total annual costs of all urban pub-lic
services, infrastructure, and social housing
would average 6.1 percent of GDP in 2013–
30, with a peak of 7.3 percent in the early
period (2013–17) due to migrant integra-tion
and the government’s ambitious social
housing program. On past trends, nearly
three-quarters of this cost would be paid by
the government through infrastructure devel-opment
corporations and finance vehicles.
Model simulations suggest that these costs
are affordable for the government because
additional revenues from a property tax or
alternative sources of revenues will be able to
cover the spending needs on aggregate with-out
increasing total government debt to GDP.
In the reform scenario, denser cities require
less investment in infrastructure—notably in
roads. Lost revenues from rural-urban land
conversion would be more than compensated
by the introduction of a property tax on
urban residential property and the apprecia-tion
of existing urban land values. Significant

66.
38 U r b a n C h i n a
Chapter 6 Reforming China’s Land Management
The context of the reforms
Land lies at the heart of China’s urbaniza-tion
challenges and is the highest prior-ity
for reform. To improve the efficiency of
China’s future urbanization, land manage-ment
reform would lead to more efficient
and denser cities, contain urban sprawl, and
reduce the environmental impacts of urban-ization.
Strengthening property rights on
rural land and clarifying collective owner-ship
arrangements would also increase the
compensation that accrues to farmers in
land transactions, thus making urbaniza-tion
more inclusive. Better use of urban land
would reduce the need for land conversion
and unlock new sources of revenues for cit-ies.
Reform needs to guarantee the long-term
supply of land and financing for urbaniza-tion,
based on transparent and voluntary
market transactions and taxation. Land
reform should be closely coordinated with
hukou, social services, and fiscal reforms.
China has significantly modernized
its land tenure framework over the past
decades, although the long-standing dual
tenure system of collectively owned rural
land and state-owned urban land has
remained unchanged. Whereas property
rights on both urban and rural land have
been strengthened, rural citizens still remain
at a significant disadvantage because of
remaining ambiguities about land owner-ship
and property rights of the state, rural
collectives, and individual farmers, and how
these stakeholders interact in the process of
urbanization, especially during the monopo-listic
conversion of rural land by local gov-ernments.
Within cities, government-led
allocation and land management have led to
underutilization of land and a bias toward
industrial land at the expense of residential
and commercial land.
Reforms should aim for a more modern
approach to land management in both rural
and urban areas. The priorities for achiev-ing
this are clarifying, titling, and registering
rural land rights; introducing new arrange-ments
for the transfer of collective land for
urban construction purposes and rural land
expropriation; developing mechanisms for
better benefit sharing of land value; integrat-ing
urban-rural land use planning and land
allocation and the redevelopment of “urban
villages”; and modernizing urban planning
and land management.
The decisions of the 3rd Plenary of the
18th Congress of China’s Communist Party
of November 2013 provide a framework for
land reforms. The framework includes fos-tering
a unified rural-urban construction
land market, clarifying and enhancing rural
land rights, and setting up new institutional
arrangements for land in rural and urban
areas. Reforms provide an opportunity to
build on past achievements, harmonize the
regulatory framework for urban and rural
land, and modernize the land system to sup-port
more efficient and inclusive economic
growth and urbanization.
In implementing a more market-driven
approach, aside from the responsibility of
planning, zoning, and registering the trans-actions,
government should closely supervise
experiments in this direction to ensure that
the stronger property rights on rural land are
respected and that corruption in transactions
is avoided. Consultation, publicity, and trans-parency
can also provide protection against
abuse.
Strengthening property rights
The tenure of rural land rights needs to be
lengthened and automatic renewal legalized.
Farmers’ 30-year farmland rights remain sub-ject
to significant uncertainties in the form of
involuntary transactions for agricultural and
nonagriculture purposes, compulsory tak-ings,
and uncertainty over whether farmland
rights can be extended upon expiration of the
second 30-year term. Under China’s Property
Law, farmland rights may be extended when
they expire. But this extension provision is
weaker than the parallel provision on urban
land, which allows the automatic renewal
upon expiration of the current term. The dif-ferent
treatment of the length of tenure rights

67.
o v e r v i e w 39
for rural and urban land conflicts with the
effort to improve the long-term tenure secu-rity
in rural areas.
The 3rd Plenary Session of the 17th Cen-tral
Committee (2008) stated that rights to
farmland should be for “long term without
change.” The 3rd Plenary Session of the 18th
Central Committee (2013) reiterated and
confirmed the policy direction of strength-ening
farmers’ property rights to land. The
“long term without change” would have to
be defined and clarified in the law through
revisions to the Land Management Law,
Property Law, and Rural Land Contract-ing
Law. Equally important is to specify the
nature of the contractual rights to farmland,
including defining the right to occupy, profit,
transfer, mortgage, and bequeath the land.
Finally, explicit provision should prevent the
reallocations of farmland within the tenure
period through the collective entity.
Property rights of farmers need to be bet-ter
documented through enforcement of writ-ten
land leases, establishment of a register of
land titles, and a system for recording land
transactions. This documentation would
enable enforcement of use and contract
rights, help to resolve land-related disputes,
and identify those whose lands are affected
by land requisition. In addition, a reliable
and complete inventory of land parcels would
provide a foundation for monitoring land
tenure security, land use planning, land allo-cation
and conversion, taxation, and land
market development. After several years of
piloting various approaches in some locali-ties,
Document No. 1, 2013, now calls for a
program to document and register farmers’
land rights throughout the country.
A land registration system based on uni-fied
rules, standards, and procedures in the
land rights registration process should be
developed over time. Along with the estab-lishment
of the land registry, unified land
classification standards need to be developed
and applied to all types of land. Following
international best practice, the currently scat-tered
administrative responsibilities for rights
and property registration for different types
of land should be consolidated into one.
Additional considerations should be given to
how to move from the current cumbersome
system of registering all land plots of a house-hold
on one single document toward a system
where individual plots are registered sepa-rately.
A registration and documentation sys-tem
based on land parcels would simplify and
facilitate future land transfers. Legal reform
should also explicitly require registering both
husband and wife as household representa-tives
to improve gender equity in future land
registration.
Reform of collective ownership of collec-tive
assets needs to complement the reform
of property rights to farmland. Collective
ownership has become ambiguous since the
introduction of the Household Responsibil-ity
System in 1978 and subsequent policy
changes strengthening household land rights.
Collective ownership is often incorrectly per-ceived
as ownership by the collective admin-istrative
entity. The Property Law has sought
to clarify this relationship and authorizes the
collective administrative entity, such as the
administrative village, natural village, or vil-lager
group, to exercise ownership rights on
behalf of the collective members. Neverthe-less,
collective entities retain control over
farmland contracting, exercise power to take
a farmer’s land, and often manage collective
assets, including land and nonland assets, to
generate profit for the collective entity rather
than for collective members.
Legal reform should clarify that all collec-tive
assets belong to the members of the col-lective
business organization and not to the
collective administrative entity itself. Where
collective property is converted into shares,
those shares should be distributed to the
members. Reforms should further seek to
reduce intervention by the collective admin-istrative
entity in the operation of collective
business organizations and to strengthen
transparency in the distribution of profits
made by the collective business organization.
Membership and qualifications for becom-ing
a collective member, and procedures for
terminating collective membership, need to
be further clarified in the law. Because the
legal criteria under which a person becomes
a member of the collective are unclear,
approval or disapproval of a membership
application is currently subject to the collec-tive’s
discretion. One approach to clarifying

68.
40 U r b a n C h i n a
collective membership and to protect owner-ship
rights of collective members would be to
define a cutoff date after which a rural citizen
moving into a community is no longer eligi-ble
to become a collective member or owner
of collective assets. Such arrangements would
prevent the dilution of collective assets under
conditions of demographic change.
The member rights associated with col-lective
property should also be clarified.
Rights to collective assets include the rights
to occupy, use, profit, transfer, mortgage,
guarantee, and bequeath. The transfer (sale)
of shares to collective property would allow
members to leave the collective permanently.
Clarification of issues around the inheritance
of shares to collective assets is also needed.
In some localities, women who marry into
households, and children born after 1978,
cannot inherit shares, and therefore can-not
receive dividends when the sharehold-ing
member of the household dies. This issue
may become increasingly critical as share-holding
members pass away or move their
residential registration outside the collective.
Their shares would eventually go back to the
collective instead of being retained within the
household.
Reforming the rural land
expropriation system
Legally defined limits need to be placed on
rural land taking by local governments for
public purposes. Defining “public interest”
for which the state can exercise its eminent
domain power is a decision about balanc-ing
the legitimate but often competing policy
goals and interests of various stakeholders.
The reform of the rural land expropriation
regime should follow the precedent of the
Urban Takings Regulation of 2011, which
defines public interest by listing all foresee-able
categories of public interest. For rural
land, defining public interest using the same
procedure would remove the current legal
dualism and inconsistency that weaken the
rights of China’s rural citizens. A meaningful
definition of public interest, both for urban
and for rural takings, should be included in
the revised Land Management Law.
Land for public infrastructure develop-ment
and social purposes could still be
acquired through expropriation, but con-trols
need to be put in place to ensure that
the land acquired is not used for commercial
purposes, and that the scale is much less than
in the past. Complementary reform is needed
to fine-tune the political incentives at the
local government level to decouple perfor-mance
evaluation and economic growth. For
example, a current mayor would face fewer
incentives to convert excess quantities of land
and promote investment if revenue gener-ated
from such land conversion could only be
invested several years later.
Compensation for rural land conversion
for commercial (nonpublic interest) pur-poses
should be increased up to the amount
of the commercial value of the land, with
deductions for the costs incurred by local
governments for preparing the land for non-agricultural
use. Under the current regime,
compensation packages are capped at 30
times the land’s average annual agricultural
output value. This maximum is often insuf-ficient
for expropriated farmers to sustain
their livelihoods. Here again, the reform of
the rural expropriation regime could follow
the principles of the Urban Takings Regula-tion
(and rules applied in several provinces).
The protection of farmers’ procedural
rights during land expropriation should be
embodied in the law. China’s procedural laws
for rural land expropriation are inadequate,
but central policies on improving farmers’
procedural rights and the Urban Takings Reg-ulation
provide guidance for developing rel-evant
provisions on procedural rights, includ-ing
the right to notice, right to participation,
and right to appeal. Clear provisions for pub-lic
hearings on land taking would increase
transparency and limit the scope for abuse.
The government may consider introduc-ing
the experiences from Taiwan, China,
where local governments have the option
to rezone rural land for urban develop-ment
and can allow commercial developers
to conduct land transactions directly with
rural property rights holders while ensuring
urban land supply and financial balances.
Transactions are subject to the provision of
urban master plans and include transparent

69.
o v e r v i e w 41
public consultation. This practice has been
instrumental in limiting excesses in develop-ment,
while maintaining support from farm-ers
who enjoy large increases in the value of
their converted land (box O.4). International
experience with land value capture could
also inform this policy reform (see chapter
8, “Reforming Urban Finance”). This model
may provide an applicable approach to bal-ance
the property interests of collectives and
farmers in peri-urban areas with the need for
the government to provide and finance pub-lic
infrastructure. A new zone-taking law
could permit urban development of a com-mercial
nature, whereby farmers affected by
the change in land use benefit in two ways:
(1) they receive part of the now urban land
and can benefit from its development; and
(2) they would be protected by stronger legal
and procedural safeguards in expropriation.
Developing rural construction
land markets
Alternatives to the currently dominant
method of land conversion by local govern-ments
are needed. A more market-driven
approach to land conversion has several
advantages, including a more efficient alloca-tion
of resources and reduced social tensions.
Following strict government regulations,
wasteful conversion of land would be avoided
because conversion would take place only
if a private developer considers conversion
a profitable venture and the collective sees
benefits in the transaction. The purchase and
development would take place at a time and
at a price supported by the market. Further-more,
social tensions and conflict with local
government would be minimized, because
the government would not be a party to the
transaction, and the price would be set by
the market. The market price would likely
also be higher than the compensation usually
offered in government-led conversions.
In line with plans and regulations of land
use, collective organizations can use land
for collective nonagricultural industrial and
commercial activities, but under the current
law, they cannot lease collective construction
land to noncollective entities for commercial
or industrial development. Furthermore, the
rights to rural homestead land are limited:
with strong emphasis on collective member-ship,
farmers only have the right to occupy
and use land, but not the right to profit from
it. In reality, large amounts of collective con-struction
land have also entered the urban
market illegally, particularly in China’s
eastern coastal areas and large cities. Land
market development and deepening in both
urban and rural areas and the integration
of rural and urban construction land mar-kets
will be essential to ensure land avail-ability
for urbanization, facilitate integrated
rural and urban development, and gradually
replace current practices of government-led
land requisition and conversion toward more
efficient market-based allocation of land.
There is growing consensus that collective
rural construction land should be allowed to
enter the urban market directly. Many locali-ties,
including Anhui, Chengdu, Chongqing,
Guangdong, Jiangsu, and Zhejiang, have
already experimented with innovative mea-sures
to let collective construction land be
leased, transferred, or mortgaged. Because
of current legal prohibitions, however, collec-tive
construction land cannot enter the urban
land market formally, and such efforts remain
at the level of piloting and experimenting.
Building on the experiments, China could
consider revisions to the Land Management
Law and Property Rights Law to clarify the
equal market entry of collective and state con-struction
land. Eventually, regulations should
clarify which land will be allowed to enter
into the urban construction land market, in
what ways, and how benefits could be shared.
Collective construction land that has already
entered the urban market in the past should
be classified, integrated into urban master
plans, and managed according to the law.
Rights to homestead land need to be
strengthened and clarified. Homestead land is
unique in China’s rural land property rights
system. According to the law, only collective
members are entitled to homestead land with
one plot per household. The law does not
allow transferring or leasing of rural residen-tial
land. In reality, homestead land has been
leased and transferred in many regions, and
reforms need to take into account the law

70.
42 U r b a n C h i n a
BOX O.4 Expropriations in Taiwan, China
In 1953, the Land to the Tiller Act abolished the ten-ancy
system in Taiwan, China, through compulsory
local authorities’ purchase of land from landlords
and resale to the tenants. By 1956, the total area of
owner-operator farming had increased from less than
50 percent of total farmland in 1948 to over 85 per-cent.
The government protected private tenure follow-ing
the land reform, through legal protection, a broad
publicity campaign to improve farmers’ awareness of
laws and government policies, and a government-led
annual survey to closely monitor the implementation
of the land reform program. In the subsequent process
of urbanization, authorities took measures to control
the use of land for urban purposes and facilitate non-farm
development by farmers themselves.
Taiwan, China, takes a listing approach to define
the circumstances under which private land can be
expropriated. “General taking” refers to the expro-priation
for public interest. “Zone taking” refers to
the expropriation and conversion of private farm-land
to nonfarm use for the development of new
urban areas; renovation of old urban areas; conver-sion
of farmland in planned urban zones into con-struction
land or conversion of industrial areas into
residential and commercial areas; development of
nonurban land; rural development for improving
rural public facilities and public health; and other
uses in accordance with relevant laws. General and
zone takings are subject to different procedural and
compensation laws.
For general taking, until recently, the compensation
standard was the tax assessment value of the agricul-tural
land. Each year, the local land administration
bureaus publish assessed values for farmland. This
standard was replaced recently with a market value
standard based on recent comparable agricultural
land market transactions. The taking procedures are
relatively simple and include a public hearing, public
announcement of the taking decision for 30 days, writ-ten
notification to the affected landowner, a 30-day fil-ing
period with the local land administration in case of
dispute over compensation, appeal of the local decision
to a land price review committee, and filing adminis-trative
litigation with a court.
Zone taking, in contrast, represents the de facto
permission of the local authorities to take private
property for commercial purposes with landowners
being entitled to higher compensation and better pro-cedural
safeguards than at present. Landowners can
claim a monetary compensation based on the market
value of the land’s agricultural use or, alternatively,
take back 40–50 percent of the expropriated land as
offset land. Such offset land is the previous farmland
that has been converted into higher value urban con-struction
land. The landowner may also select a com-pensation
scheme in which one part of the compensa-tion
is paid in cash and one part with offset land.
Procedurally, the local authority is required to
purchase land from landowners through negotiation
before launching a zone-taking procedure. If negotia-tions
fail, the local authority may resort to zone tak-ing.
Prior to taking, the local authority must conduct
public hearings to explain compensation modalities to
the affected landowners. Where landowners choose
compensation in the form of offset land, these own-ers
have first choice on the location of the offset land
within a designated construction area. Landowners
are also given the opportunity to negotiate the exact
compensation ratio (between 40 and 50 percent) to be
applied.
Under zone taking, the local authority is required
to set aside a portion of the expropriated land for pub-lic
facilities such as schools, roads, and public utility
facilities. Although there is no legal requirement with
respect to the ratio of such public facility land, in prac-tice,
40–50 percent is for public use. After deducting
40–50 percent of land as offset land, 40–50 percent
as public use land, the local authority receives 10–20
percent of the expropriated land for sale to developers.
To prevent irrational urbanization, the law requires
that new public facilities be financed through the sale
of the land acquired through zone taking and pro-hibits
the use of other local revenues to finance such
development. The local authority therefore needs to
rely on the proceeds from selling the 10–20 percent
share of taken land to finance the construction of all
public facilities within the zone. Expropriated land is
first converted and registered as state owned upon the
completion of zone taking. After offset land selection,
such offset land will be reregistered as privately owned
land. The remaining construction land sold to devel-opers
will also be registered as the developer-owned
land. In the end, only the land used for public facilities
remains state owned.
Source: DRC and World Bank staff research.

71.
o v e r v i e w 43
and the reality. Enhancing de-facto property
rights to rural homestead land is important
for promoting rural-urban factor mobility
and construction land market integration.
Farmers’ usufruct property rights to home-stead
land are defined under the law, but their
entitlements are confined only to the “right to
occupy” and the “right to use.” The “right to
profit” is not defined. As part of the reform,
the definition of usufruct property rights to
homestead land should be harmonized with
the general usufruct property rights—that is,
to extend it to the right to profit. At the same
time, given the accelerated urbanization of the
people, especially the conversion of farmers to
urban residents, the membership identities of
homestead land and the nontradable nature
of such land have made effective land use
more difficult, and farmers find it impossible
to realize the value of their homestead proper-ties.
Government could select different types
of regions to conduct reform pilots on the
homestead land system, to explore fee-based
access to and use of homestead land as well as
the trading and transfer of homestead land,
and break down the boundaries of homestead
land members and village communities. The
goal is to gradually move toward a system
of property rights entitlements in return for
the right to benefits payout. Land use regu-lation
must be strengthened under such pilot
programs. In addition, as the mortgage, guar-antee,
and transfer of farmers’ homes and
homestead land are important components of
farmers’ property rights to homestead land,
a number of pilot regions should experiment
with the mortgage, guarantee, and transfer of
farmers’ homes and their use/rights to home-stead
land, and to roll out such reforms when
conditions are in place. Such an approach
could help harmonize farmers’ home prop-erty
rights with urban rights to residential
property. The inequality of these rights is a
major contributor to China’s rural and urban
income disparities.
Innovation in land institutions in
peri-urban areas
Integrating urban villages into the formal
urban development process could increase
land supply for urban development. Inte-gration
would also provide opportunities
for boosting the availability of low-income
housing and for allowing collective organiza-tions
and rural residents in peri-urban areas
to economically benefit from urbanization,
as construction land markets are allowed to
develop based on stronger land rights. As dis-cussed,
revisions of the Land Management
Law and other laws are needed, along with
the formulation of implementation guidelines
to allow rural collective organizations in peri-urban
areas to develop collective construc-tion
land to developers for urban commer-cial
and residential development within the
framework of urban master plans. Through
appropriate zoning, local governments could
provide incentives to build low-income hous-ing
in those areas while avoiding resettlement
and demolition costs under government land
taking, since collective construction land
remains under collective ownership.
Optimizing urban land use
China would benefit from replacing its cur-rent
standards-driven urban planning sys-tem
with a more dynamic system that would
facilitate efficient land use and better coor-dination
between planning and finance.
Based on good international practice,
the system would incorporate the follow-ing:
strategic and long-term economic plan-ning;
coordination of sectoral plans and
finance; consideration of the impact of pro-posed
developments on key urban systems
such as transportation, environment, public
services; enhanced public and private par-ticipation;
and performance monitoring.
University urban planning schools, the urban
planning profession, as well as key ministries
would need to adopt the new system. Urban
planning competitions could lead to more
innovative plans that identify efficient land
use patterns.
Land use in cities needs to become mar-ket
based. The current bias toward indus-trial
land and the subsidization of industrial
land to attract industry risks locking China
into its industrial past, creates barriers for
the development of the services industry, and
keeps housing prices high. Furthermore, local

72.
44 U r b a n C h i n a
government could reclaim land allocated to
public entities, which covers large areas within
cities, such as public spaces, and is often used
inefficiently, and put part of that land into
the market. How the value increases on such
land should be clarified. Urban land zoning
that is sensitive to demand and allocation of
all land use titles by auction would in many
cities lead to less land used for industry and
more for commerce and housing. With ris-ing
land prices resulting from market-based
allocation, land-intensive industry would
move to secondary cities and rural areas, and
redeveloped industrial land could be rezoned
for mixed use. With the expiration of the
first 40-year lease terms for industrial land,
China’s local governments have an oppor-tunity
to recycle inefficiently used industrial
land. This land can be rezoned and rehabili-tated
and be made available for competitive
auctioning for other than industrial purposes,
thus meeting the needs for industrial upgrad-ing
and shifting land from industry to ser-vices
and residential use.
Reforms in the urban land market also
should introduce transparency in the sec-ondary
land market transactions. In urban
areas, the government monopolizes the pri-mary
land market, whereas the market for
follow-on transactions (that is, the second-ary
market) remains underdeveloped and
opaque. Local governments generally lack
the means to monitor transactions on the sec-ondary
land market. In particular, when land
is converted for purposes with a higher value,
the government would fail in most cases to
benefit or capture the value from related land
transactions. Regulations should require reg-istration
of all urban land transactions with
local land registries. More complete registra-tion
would allow local governments to collect
fees from transactions and to capture a share
of the value increase in urban land.
Flexible zoning regulations would encour-age
more efficient development of urban areas
and reduce the need for further land con-version
(World Bank 2008) (box O.5). The
floor area ratio (FAR), a measure of building
density, would be better applied at the indi-vidual
building plot rather than the super-block
level, and a more streamlined process
can be developed to allow for densification of
existing plots based on market demands and
priorities, creating incentives for development
within existing built-up areas instead of the
urban periphery. Moreover, the planning
system can be reformed to allow developers
to subdivide superblocks and sell individual
plots, with specific FARs and zoning regula-tions,
to third parties. This type of transac-tion,
driven by rising land prices, is funda-mental
to incremental densification.
Smaller plots and mixed land use can
be encouraged in new developments. Chi-nese
cities should move from superblocks to
smaller plots with finer grain connectivity.
Typical urban blocks in developed countries
measure 150 meters by 150 meters and have
several plots; China, however uses a much
larger scale (box O.6). Reducing the size
of blocks would help create more vibrant
urban land markets and favor competition
from smaller developers. Smaller blocks are
also essential to integrate neighborhoods for
higher agglomeration economies and pro-mote
infill development.
Land use optimization and intensification
is required at the building, neighborhood,
and metropolitan scales. At the building and
block scale, traditional medium-height (five
to seven floors) perimeter blocks of about
100 meters a side offer the highest potential
for densification, with gross FAR (including
infrastructure) usually three times higher
than towers-in-a-park superblocks of 400
meters a side. At the neighborhood scale,
the density of urban fabric can be balanced
by a fine mesh of streets irrigating the urban
fabric and by a dense distribution of public
parks and amenities. At the metropolitan
scale, planners need to identify the areas
where infill would increase the compactness
and decrease the fragmentation of the urban
area. Moreover, planners can give an efficient
shape to metropolitan growth by concentrat-ing
densification actions along transportation
corridors and discouraging leapfrog and edge
sprawl (box O.7).
A property tax would help optimize land
use. In supporting report 6, a property tax is
proposed as part of the fiscal reform agenda
to realign local government revenues with
expenditures. An additional benefit of a prop-erty
tax would be the creation of incentives

73.
o v e r v i e w 45
BOX O.5 Seoul becomes a global city by recalibrating regulations and market instruments
Home to more than 10 million people, producing
one-quarter of national GDP on 1 percent of its land
area, Seoul is the Republic of Korea’s interlocutor
with the global economy. The surrounding Seoul
Metropolitan Area (SMA), consisting of 29 cities
(including Seoul and Incheon) and four counties,
contains half the nation’s population and dominates
the national economy, generating around half the
national GDP on 12 percent of the country’s area.
Over the past 70 years, however, a tension has
arisen over how best to manage the SMA. Some,
concerned that rapid SMA growth would lead to
regional imbalances, argued that growth should be
constrained with strict regulation. Others called for
free-market initiatives to promote further develop-ment,
allowing the country’s strongest economic
base to flourish.
In time, even the strongest regulations enacted to
contain Seoul’s growth have lost ground to local and
global market forces. Quantitative measures included
regulations to restrict development in certain areas,
impose fines on buildings exceeding allowable param-eters,
limit allocations of land to industry, limit the
industrial output allowed in the SMA, prohibit vari-
ous classes of activities, and require national govern-ment
approval for land development projects exceeding
1 million square meters. In the 1970s, a greenbelt strat-egy
was employed to constrain Seoul’s growth, while 14
cities were to be promoted across the country.
These controls were not successful. Investors and
citizens led a rapid succession of new projects, includ-ing
residential complexes, metropolitan highways, new
towns, and a new international hub airport—bypass-ing
the objective of limiting growth. Moreover, the
controls hurt efficiency: over 200,000 factories in the
SMA were unregistered, contributing to unmanaged
urban development. And urban growth became frag-mented,
exacerbating congestion and environmental
degradation.
As Korea sought to position Seoul as a 21st-century
world city, the government relaxed quantity limits that
restricted the location of new colleges, firms, indus-trial
estates, and housing sites. It adopted price instru-ments,
levying a development charge on new com-mercial
buildings. By recalibrating city management
through deregulation and market instruments, Korea
is making Seoul’s quest to become a global city more
likely to succeed.
Source: Urbanization study team.
BOX O.6 The lack of connectivity and fine grain networks in Chinese urban development
The following pictures illustrate the size of blocks
and impacts on connectivity of a series of cities in
China, Europe, and Japan. The last two images on
the right show the lack of connectivity and the increase
of average distances between intersections in recent
urban developments in China.
Turin,
Italy
Barcelona,
Space
Paris,
France
Ginza
Tokyo,
Japan
Pudong
Shanghai,
China
Towers
North Beijing,
China
Intersections
per km² 152 103 133 211 17 14
Distance between
intersections (m) 80 130 150 43 280 400
Source: Salat 2013.

74.
46 U r b a n C h i n a
BOX O.7 Comparing urban densities in two areas of Shanghai
800m × 800m squares
for developing underdeveloped and vacant
land and for increasing land transactions. In
some countries, cities have opted for a split-rate
property tax to provide the incentive of
lower taxes for capital investment in building
improvements, and tax away the speculative
value of holding undeveloped property within
the urban growth area, thus promoting inﬁll
and redevelopment. Experience in several
communities in Pennsylvania indicates that
a split-rate property tax can be an effective
tool to stimulate central city revitalization.
This form of tax also is implemented in Hong
Kong SAR, China; Pittsburgh, United States;
Sydney Australia, as well as cities in Den-mark
and Finland.
Coordinating land use planning
with housing, infrastructure, and
financing
It is critical that land use be coordinated with
infrastructure provision that meets current
needs as well as projected future demand.
Higher densities in cities can drive economic
growth, but they also require additional
infrastructure investments to ensure that the
benefits from density are not overshadowed
by congestion, environmental, or other costs.
China has a unique historic opportunity to
apply Transit Oriented Development (TOD)
and to optimize and intensify land use on a
large scale along major urban transport cor-ridors.
The urban rail network will reach
3,000 kilometers by 2015 and double that by
2020, with over RMB 4 trillion in cumulative
investment. The high speed and express rail
network is also expected to reach all major
cities of more than 500,000 people by 2020.
Development can be focused along urban
transport corridors. Along with public tran-sit
improvements, certain corridors could be
assigned higher development intensities, and
local governments could channel land con-version
quotas to these areas by allowing
the transfer of land conversion quotas from
slower-growing areas outside the corridors.
To foster more coordinated development
around transport nodes, changes in zone
ordinances should be simplified, allowing
higher FARs, population density, and build-ing
heights around transit stations and spe-cially
designated boulevards and plots (box
O.8). Land use regulations can encourage a
mix of residential, commercial, and special
Pudong is often considered a model of high-density
urban development. The two figures below com-pare
two districts—Pudong and Puxi—located on
the opposite side of the Huangpu River. Despite the
higher buildings in Pudong, the gross urban density
is lower than in Puxi because of the large infrastruc-ture
(highways and parking space) and setbacks asso-ciated
with large-scale buildings. The coverage ratio
is only about 14 percent, and gross urban density is
only 1.2.
HongKou—Puxi Lujiazui—Pudong
Building type
Low-rise housing,
Shanghai
Towers,
Shanghai
Coverage ratio 53% 14%
Gross urban density 1.9 1.2
Source: Salat 2013.

75.
o v e r v i e w 47
bOX O.8 Seoul’s spatial strategy: Diff erentiation and higher densities around metro nodes
Seoul’s spatial structure is compact (expansion is
restricted by hills and by the northern border) and
polycentric, with a large central business district (CBD)
but many important subcenters. A gridlike metro sys-tem
links the various subcenters and the CBD. The
fl oor area ratio (FAR) in Seoul is linked to the location
of metro stations and to the network of main streets:
industrial uses (media and entertainment)
and confer the right to adapt and reuse com-mercial
buildings as housing, especially in
boulevard and transit station areas. Govern-ment
could provide developers with “addi-tional”
FARs to build affordable rental hous-ing
and to keep unit prices manageable and
accessible to low-income households. Innova-tive
land-value-capture mechanisms should
be introduced to support the construction
and operation of the necessary transport and
other urban infrastructure.
Existing urban areas can be regenerated
to provide affordable housing and minimize
low-density development and sprawl. Inter-national
experience suggests that suburban
development generates economic benefits
that peak in five to seven years. Regenera-tion
of urban cores to provide affordable
housing in established cities requires higher
up-front costs because of the more complex
civil works, upgrading of public spaces, and
improvement of existing services required.
FAR of 10 in part of the CBD, 8 in the rest of the
CBD and subcenters
FAR of 0.5 to 4 in residential areas
FARs are higher in areas around main metro nodes
Once revitalized, however, these urban cores
become self-sustaining because they attract
additional investments for a considerably lon-ger
period of time.
Incentives can be provided to ensure that
needed housing is constructed at affordable
prices. Zoning policies could require or cre-ate
incentives for developers to include low-income
housing in new large-scale housing
and mixed-use developments. The share
of low-income housing is usually around
10–20 percent of the housing stock in OECD
countries. Developers and property owners
could be allowed to increase densities and
use additional FARs to provide low-income
and affordable housing. In addition, the
government could provide special subsidies
for the construction of affordable housing
units. Several countries have used “inclusion-ary”
or “incentive” zoning successfully; for
example, Fairfax County, Virginia, United
States, approved a plan to rezone an area
around a subway station to increase density
Source: Bertaud 2004.

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48 U r b a n C h i n a
substantially, and it required the developer
to devote at least 5 percent of the develop-ment
to affordable housing. Affordable hous-ing
can be built on vacant, abandoned, and
underdeveloped government land, including
parking lots around public buildings; low
density structures in areas zoned for high-density
development; and land around rail-roads,
airports, and oversized roads. The
rehabilitation of existing and older buildings
to minimum safety standards could also pro-vide
reasonable and affordable housing for
low-income people.
Integrating urban village land into urban
development could boost the availability of
low-income housing. As the property rights
on rural land are further clarified, an oppor-tunity
may emerge for rural collectives in
peri-urban areas to develop or lease collective
construction land for commercial and resi-dential
development within the framework
of urban master plans. Such an approach,
based on ongoing experiments, would allow
collectives and their members with no farm
income to receive income from urban land
development.

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Chapter 7 Reforming Hukou, Social Services, and
Labor Market Institutions
China’s urbanization faces two inequalities:
a “new dualism” between local hukou and
migrant populations, and the “old dualism”
of urban and rural disparities. China can
build a more inclusive and productive labor
market, one that would help to increase the
efficiency of urbanization and overcome both
the new and old dualisms, by reforming the
hukou system to reduce the barriers to mobil-ity.
More migration will reduce the labor sur-plus
in the countryside more rapidly, which
would increase rural wages relative to urban
wages, thus reducing urban-rural inequali-ties.
Better integration of migrants into urban
areas will offer them access to better jobs and
more opportunity to acquire property and
thus to benefit from capital gains. Equalizing
access to social services between migrants
and local hukou holders in urban areas and,
over time, across China will contribute to a
more inclusive society.
Equalizing access to basic social services in
urban areas requires the reform of the hukou
system. Making social entitlements available
to all workers and their families in their areas
of residence would deepen the human capi-tal
base and promote a healthier workforce.
It would improve intergenerational income
mobility, reduce future inequalities, and alle-viate
social tensions.
The full benefits of a residence-based
system will be realized at the national level
and therefore a national, unified approach is
needed. The fiscal system should allow for
the financing of a basic package of social ben-efits
across China while providing incentives
for local governments to top up the package
for all residents, if possible, and holding local
authorities accountable for providing services
to all residents. The fiscal implications of the
basic package are likely to be significant, but
reforms in health, education, social protec-tion,
and social housing, and cross-cutting
reforms in accountability for service delivery,
could contain costs and increase efficiency.
Reforming hukou
To create a mobile and versatile labor force
with equal access to a common standard of
public services, the household registration
system would need to move from an ori-gin-
based to a residence-based system. The
hukou system and residency system can oper-ate
in parallel, as similar systems do in Japan
(see box O.3). A residency registration would
provide access to location-specific services
such as education, health care, welfare, and
affordable housing, whereas hukou could be
maintained to provide rights such as access
to land profits. As land reforms and pension
reforms progress, the rights derived from
hukou could be adjusted. In March 2011, the
State Council called for a gradual rollout of
the residence permit system and requested
that institutions take steps to improve regis-tration
of temporary populations in the cities.
The central government would define the
principles and national framework for the
residence-based system and provide guide-lines
for local governments to follow, includ-ing
the system by which local governments
would grant residency to people who live in
a specific locality and the sequence of entitle-ments
that accrue upon attaining a residence
permit. In the short to medium term, it may
not be practical to expect common eligibil-ity
criteria (such as the number of years of
residence or of social insurance contribu-tions),
but the central government should set
minimum guidelines for local governments to
follow and create a time-bound pathway for
extending access privileges.
Local governments can define the sequenc-ing
of access to privileges and the qualify-ing
periods to move from one step of the
entitlement sequence to the next. Already,
many localities have implemented local-ized
residence permit systems with different
approaches and requirements, from more lib-eral
ones in small cities, to strict point-based
systems in Guangdong and Shanghai. In the

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50 U r b a n C h i n a
initial phases, it is unlikely that all social
entitlements of current local residents could
accrue to new residents immediately upon
obtaining a residence permit, but for the very
fundamental rights, requirements should
be very simple and low. Cities should seek
to reduce the current prioritization of those
with higher socioeconomic status. With time,
the scope and content of basic public services
would have to be standardized based on
national guidelines, and the conditions and
requirements to obtain a local residence per-mit
would converge. Such convergence would
be supported by broader reforms in the fiscal
and taxation systems, equalization of public
services, and rural-urban integration.
An information technology platform
developed according to national standards
would facilitate implementation of the resi-dence
system and will be particularly impor-tant
for the exchange of population data
across jurisdictions. The platform would
provide quantitative information for making
fiscal allocations, as well as supply data for
monitoring and evaluation.
Additional fiscal resources and a rebal-ancing
of central and local financing respon-sibilities
will be needed. Cities need to
be subsidized for the increased costs of pro-viding
services to migrants through reallo-cation
of provincial resources from rural
areas. Because this reallocation is likely to be
achieved only gradually, a transitional sub-sidy
to cities to entice them to deliver social
services would accelerate the integration of
migrants. In the medium term, fiscal system
reforms of both revenue and expenditure
are needed to finance national minimum
standards for social services across China,
which should be carefully calibrated to fit fis-cal
capacity and would need to be phased in.
Local authorities could provide a top-up for
all residents in their jurisdiction if desired, and
the private sector could also help create fiscal
space through high-end medical services, pri-vate
third-pillar pensions, and private schools.
Extending access to basic
services to migrants within cities
The current package of social services pro-vided
to China’s urban residents includes
nine years of free compulsory education,
access to basic public health care services,
social security (medical and old-age pen-sions)
for formal sector workers and resi-dents,
a social assistance program, and a
welfare housing system. Extending access
to this package for migrants under the cur-rent
modality of service delivery will require
additional annual resources in urban areas of
between 1.22 percent (lower bound) and 4.53
percent (upper bound) of GDP. The main fac-tors
determining the costs are assumptions on
how many migrant children would join the
urban system and what part of the pension
costs are covered. The lower bound covers all
migrants and children currently in cities and
the cash costs of integrating migrants in the
urban pension system. The upper bound cov-ers
all left-behind children and total accrued
costs for the urban pension system. A reason-able
assumption would be that the lower-bound
costs would be covered by a special
grant from central government, whereas the
costs beyond that would have to be absorbed
by reallocation of resources through changes
in the intergovernmental fiscal system.
The current policy on migrant children’s
right to universal compulsory education is
already residence based, and migrant chil-dren
attend public and private (minban)
schools. Equalization options could include
sending migrant children in public schools to
private schools with a public subsidy to cover
their fees. The annual cost is in the vicinity
of 0.98 percent of GDP (for the migrant chil-dren
currently in the cities) and 2.27 percent
of GDP (for all migrant children, including
the left-behind children).
Equalizing access to health services for
migrants in the cities requires improving
access to public health programs and basic
medical care, as well as expanding the urban
health insurance scheme through conversion
of migrants’ current eligibility in the voluntary
and subsidized national rural scheme. The
annual total cost would be about 0.15–0.16
percent of GDP, depending on the assumption
about the cost increase.
Rural migrants could be incorporated into
either the current urban worker pension sys-tem
or the newly combined urban and rural
residents’ pension scheme. The annual total
cost is in the vicinity of 0.03 percent of GDP

79.
o v e r v i e w 51
(accounting for the cash flow cost) and 1.95
percent of GDP (accounting for the accrued
liability cost).
Migrant workers and their families should
be eligible for social assistance (dibao) pay-ments
after they acquire residency rights and
meet qualifying conditions. Currently, more
than 70 percent of urban and rural dibao
aggregate expenditures are financed by the
central government, providing a financial basis
for improved access to urban dibao and other
assistance programs for migrants. Assuming
the incidence of dibao receipt among migrants
is similar to that of urban hukou residents, the
annual cost of covering these additional fami-lies
is about 0.04 percent of GDP.
A policy that encourages a rental market
for low-income housing would give migrants
access to affordable housing. Homeowner-ship
is not fiscally possible, but neither is it
economically desirable because renters, being
more mobile, contribute to the efficiency of the
labor market. Research has shown that econ-omies
with small rental sectors face higher
migration costs and labor rigidity. Demand-side
subsidies based on a means-tested target-ing
approach would address the housing needs
of the lowest-income households. The annual
total cost is around 0.02–0.11 percent of GDP,
depending on eligibility assumptions.
Equalizing access to services
across China
In China, services are easier to access and are
of better quality in urban areas than in rural
areas. Recognizing the importance of improv-ing
services in rural areas, the national gov-ernment
needs to establish a basic minimum
package of services that would be offered to
all citizens, with the fiscal system enabling
every jurisdiction to meet this standard. This
minimum standard of service would also
reduce the incentive to migrate for the pur-pose
of receiving better services rather than
for better employment. This basic package
should be complemented by clear quality
standards for various services (national or
provincial), which should focus on outcomes
(such as graduation rates and test scores in
basic education), but which could also spec-ify
per student public expenditure, percent
of qualified teachers in each school, and
other inputs. The fiscal system would have
to accommodate minimum standards, which
would require careful calibration so that
China can afford them. It would also require
a system of fiscal equalization that takes into
account a locality’s own revenue potential
as well as expenditure needs based on the
requirements for meeting the minimum stan-dards
(see chapter 8). Accountability systems
should be in place to enforce these standards,
and to achieve this, China could use three
broad channels: government, citizen-based,
and choice-based systems.
Fiscal resources should follow people. The
fiscal system should be closely linked to the
new modern residence system—once people
have moved to a new location, registration
would increase the population count used for
fiscal allocations. Such a link would reduce
the resistance of receiving cities to delivering
services to new arrivals: in addition to a gain
in the tax base, they would also receive larger
transfers from the center to accommodate
the delivery of the basic package. Beyond
the basic package, provinces, cities, or towns
may raise the standard for their jurisdiction,
but they would be responsible for provid-ing
additional funding. Cities could decide
to raise the standard because they are more
affluent, because their residents demand dif-ferent
or better services and are willing to pay
higher taxes, or because they wish to attract
new residents. Experiments will reveal best
practices, especially combined with the pos-sibility
for easier migration following hukou
reform. Cities will have to seek an affordable
balance that satisfies their residents and the
needs of their local economy.
The urban health delivery system would
need to be strengthened to cope with the
expected increase in demand. This could be
achieved by improving primary health ser-vices
and coordination among health provid-ers;
integrating and ensuring portability of
health insurance to allow citizens to choose
the best treatment; strengthening health
promotion and illness prevention in urban
settings; and implementing effective cost
containment and quality improvement mea-sures.
Provider payment reform, an effective
cost containment measure and one impor-tant
element of this reform, should replace

80.
52 U r b a n C h i n a
the dominant fee-for-service payment system
with a combination of capitation-based and
diagnosis-related group-based system, which
internationally has a proven track record for
containing the costs of inpatient care.
Narrowing the disparities in the quality
of basic education and expanding access to
senior secondary and early childhood edu-cation
will be needed. Reform in financing
would facilitate minimum standard setting
for every level of education and ensure cen-tral
transfers for equal access to and the qual-ity
of education for poor rural localities and
disadvantaged children. Demand-side mecha-nisms
that stimulate competition and allow
higher levels of private provision can satisfy
the selective needs of some parents. Teachers’
incentives need to be realigned to improve the
quality of instruction and strengthen school
management to meet the needs of migrant
students and parents, as well as the larger
community whose children already attend
public schools. Peer tutoring programs, com-puter-
assisted learning tutoring programs,
after-school support, tuition, and resource
personnel targeted at migrant students and
their families will further support the integra-tion
of migrant children.
Pension reforms are required to facilitate
labor mobility, narrow gaps in pension ben-efits,
and cope with population aging. In
the short run, national guidelines could ease
the transfer of pension rights and benefits
between schemes and locations. In the long
run, the urban worker pension scheme could
be reformed through the introduction of a
notional defined-contribution design while
developing a financing strategy to resolve
the legacy cost outside the reformed pension
system. These reforms would lower the exist-ing
high contribution rates, provide stronger
incentives for employers and employees to
contribute, and realize the objective of a tar-geted
replacement rate.
Migrant workers with labor contracts
can be encouraged to join the reformed
urban workers’ pension scheme to reduce
the ­government
subsidies needed for the
rural residents’ pension scheme. To phase in
reforms, pooling could proceed first at the
provincial level and then be expanded to the
national level, supported by an integrated
national data management system underpin-ning
the nationally pooled and integrated
system. Finally, gradual reforms in retirement
age and rules for raising pensions in compen-sation
for price and welfare increases (index-ation)
would ensure the adequacy of pension
benefits and the sustainability of the pension
system over time.
Reforming dibao and other social assis-tance
programs requires consolidation, stan-dardization
across space, and harmonization
with antipoverty interventions in poor coun-ties
and other social programs. Currently,
dibao thresholds vary across China, reflecting
its highly decentralized implementation. Most
high- and middle-income countries apply a
unified formula for determining eligibility for
national welfare programs, while maintain-ing
some flexibility, including regional cost-of-
living adjustments. China could gradually
move toward a more systematic approach in
determining eligibility thresholds from county
(city) to prefecture, from prefecture to prov-ince,
and finally to a nationwide setting.
Increased service delivery sophistica-tion
and ambitious equalization goals call
for greater accountability for outcomes,
cost-effectiveness, and transparency. Given
the scale of China’s challenge to increase
accountability for better results in service
delivery, it will be important to make prog-ress
through three broad channels: govern-ment,
citizen-based, and choice or market-based.
Compared to most countries, China
has traditionally relied less on citizen and
choice or market-based accountability chan-nels
in the social sectors. Even within govern-ment,
mechanisms with significant potential
for increasing accountability are underused.
Government systems can promote better per-formance
from service providers by linking
budgetary transfers to the performance of
subnational governments. Human resource
management and compensation systems
and facility-based management initiatives
could also become more performance-based
channels. Regulation, accreditation, and
licensing systems for providers are increas-ingly
important tools and are expected to be
core elements of the modern and diversi-fied
system of social service provision in
China. Citizen-based channels for enhancing

81.
o v e r v i e w 53
accountability could be strengthened by
providing more public information on ser-vice
delivery costs and performance (an area
where China already has started program-specific
transparency initiatives, for instance,
the publication of the dibao list) and harness-ing
information efforts to generate citizen
oversight and feedback on service delivery
performance. Another channel for citizen
involvement is more direct incorporation
into management and oversight institutions.
Choice and market-based channels to pro-mote
accountability will require greater reli-ance
on demand-side financing of services
where appropriate and greater public pur-chasing
of social services.
Improving labor market
institutions
Upgrading human capital of workers through
on-the-job training and in learning institu-tions
would increase geographic, occupa-tional,
and sectoral mobility and promote
agglomeration effects. Promoting a more
modular and competency-based techni-cal
and vocational education and training
system and reforming the tertiary educa-tion
system to focus on increasing the labor
market relevance of higher education would
bring positive returns. In addition, greater
coordination of the technical and academic
education streams would allow students to
move between them with due credit for com-petencies
acquired in either system.
Strengthening labor market institutions
that facilitate efficient labor market transac-tions,
balance wage and productivity growth,
and mediate labor disputes would promote
mobility. Reorienting the basic function of
the minimum wage from a minimum-income
guarantee to an instrument of collective bar-gaining—
more common in OECD coun-tries—
would be an important step in this
direction. Further, while income taxes are
low for most of the population, by interna-tional
standards, the total burden of taxes
and social premiums is higher than in most
OECD countries, and well above East Asian
regional comparators. Parametric reforms
in pension systems (extending the pension
age, removing legacy costs from the pension
system) offer potential for reduction in pen-sion
premiums, while shifting the burden to
more broad-based revenue sources. Finally,
with the passage and implementation of the
Labor Contract Law, employment protection
in China has become higher than the average
rate of protection in OECD countries. The
medium- and long-term impacts of enforc-ing
this law should be carefully monitored, so
that improvements and amendments can be
made as needed.

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54 U r b a n C h i n a
Chapter 8 Reforming Urban Finance
The context of the reforms
Urban finance reform is the cornerstone for
efficient, inclusive, and sustainable urbaniza-tion.
Fiscal and financial reforms would need
to be aligned with the changing role of the
state and provide local governments with
incentives to pursue evolving national goals.
China faces the challenging task of eliminat-ing
disparities in service levels between urban
residents and migrant workers and putting in
place infrastructure and social services that
can accommodate around 300 million new
migrants in cities in the next two decades.
Over time, the fiscal system needs to finance
a minimum level of services across the coun-try.
With reforms, the fiscal benefits from
urbanization and the scope for raising addi-tional
revenues will be adequate to accom-modate
the rising expenditure needs as well
as a projected decline in revenues from land
conversion as China’s urbanization becomes
more efficient.
Reforms are needed to address underlying
problems rather than to simply fill the financ-ing
gap for public services and infrastructure
spending. China’s urbanization has revealed
several weaknesses in the fiscal and financial
systems that have contributed to making Chi-nese
economic growth less efficient and less
inclusive, including an overreliance on land
financing, unregulated borrowing by local
governments, fiscal distortions that skew the
location decisions of enterprises and people,
and a lack of discipline on local government
spending decisions.
Accommodating the changing role of gov-ernment
will be the centerpiece of the urban
finance reforms. A reformed system should
more clearly separate the function of govern-ment
as the provider of equitable and efficient
public services from the investment and pro-duction
functions of other government sec-tors.
The fiscal system will need to support
the movement of people and enterprises to the
places where they are most productive rather
than to where they get the best tax or land
deal from local government. Public finances
will need to accommodate the integration of
migrants and their families in urban areas.
Revenues from land conversion are likely to
taper off, so new local revenue sources are
needed to replace lost revenue in a manner
that is neutral to the type of economic activ-ity.
Properly regulated access to borrow-ing
will be needed to finance infrastructure
investment. The financial sector will need
to efficiently intermediate capital to meet
local governments’ needs for infrastructure
finance, and at the same time impose finan-cial
discipline on local governments and avoid
financial sector disruption. Finally, the private
sector could play a larger role in financing
and delivering infrastructure and other public
services.
A comprehensive reform—rather than
piecemeal changes to the system—is called
for. Under the current financing system, it
is difficult to separate reforms in tax and
its administration, intergovernmental fiscal
arrangements, land finance, urban infrastruc-ture
financing, and local debt management,
and therefore it is necessary to consider how
the various elements of the reform package fit
together and the joint impact they may have
on the economy. Some elements of the reform
can be accomplished quickly, for example, by
reassigning some expenditure responsibili-ties.
Others should be phased—beginning in
provincial cities and moving later to other cit-ies.
Yet others should be implemented in the
longer run. In this way, the proposed compre-hensive
reform package could be introduced
gradually.
Reforming government sources
of revenue
The fiscal system is an important incen-tive
mechanism—and the revenue base and
transfer system should be reformed to pro-vide
local governments with the resources
and incentives to provide public services to
all residents, while increasingly taking on
the role as enabler of urban development and
growth rather than as active developer of
land and urban expansion. Local government

83.
o v e r v i e w 55
incentives to attract investments and retain
enterprises would need to be rebalanced
to curtail inefficient tax competition and
support for unviable enterprises. Reform-ing
the tax structure and tax-sharing sys-tem
is important in this respect, but so are
rules that would regulate other sources of
support—including cheap land, subsidized
utilities, and tax reductions. One step could
be to require local governments to publish
information on the support they give to
enterprises, possibly through an annex in the
annual budget. Countries like Chile, India,
and Korea publish annual reports on tax
expenditures that reveal such support. The
EU regulates the type of state support that
a country is allowed to provide enterprises,
limiting it to those activities that support EU-wide
objectives such as regional development
and research and development (box O.9).
A solid revenue base for local governments
is important for efficiency and account-ability.
It is common in unitary states that
subnational governments spend more than
they raise themselves, not least because
some taxes, like the value added tax (VAT),
BOX O.9 European Union rules on investment incentives
Government financial support for corporate facil-ity
investment and expansion continues to be com-mon
practice in most parts of the world. Economic
development agencies in many parts of North
America and Asia can provide an attractive incen-tives
package for potential investors. Countries in
the European Union (EU) are different: European
agencies are constrained in their ability to provide
incentives by rules set by the EU’s European Com-mission.
There are comparatively few tax incentives,
because the European Commission considers “fiscal
state aid” to be harmful and therefore prohibits it
in most cases. Rules on state aid are covered under
Article 107 of the Treaty on the Functioning of the
European Union (TFEU), which lays down a general
rule that the state may not aid or subsidize private
parties in distortion of free competition, although it
may approve exceptions for specific projects address-ing
natural disasters or regional development.
Measures that fall within the definition of state
aid are unlawful unless provided under an exemp-tion
or notified. State aid is defined under Article
107(1) of the TFEU as the transfer of member state
resources that creates a selective advantage for one
or more business undertakings; that has the poten-tial
to distort trade in the relevant business market;
and that affects trade between the member states.
Where all of these criteria are met, state financial
support is unlawful unless provided under a Euro-pean
Commission exemption. State aid rules are
defined for specific areas, including research and
development (RD) and regional aid. In the after-
math of the global financial crisis, special temporary
rules regulated state aid to financial institutions. EU
rules apply to a wide range of instruments, includ-ing
grants; low-interest loans or interest rebates; state
guarantees; the purchase of a shareholding or an alter-native
provision of capital on favorable terms; exemp-tions
or reductions in taxes, social security, or other
compulsory charges; or the supply of land, goods, or
services at favorable prices.
The European Commission’s Directorate of Com-petition
Policy sets ceilings called the “maximum aid
intensity” for the level of incentives that can be pro-vided.
For regional aid, these ceilings are based on
the average GDP in each region, which means that
the less affluent areas of Europe have higher ceilings,
unlike the more prosperous parts of Europe where the
ceiling is often zero and no incentives are allowed.
Subsidies are allowed in regions with an average per
capita income less than 75 percent of the EU average.
Subsidies up to 30 percent aid intensity apply in those
regions; aid intensity can reach 50 percent in regions
with per capita income of less than 45 percent of EU
average. The ceilings can also differ based on the size
of the company and the size of the project. The ceil-ings
are expressed as a percentage of either a project’s
capital expenditure or the payroll of any new employ-ment
generated by a project in the first two years. For
RD, the variations in the allowed aid intensities are
based on the size of the market failure in specific RD
activities. They range from 100 percent for fundamen-tal
research to 50 percent for industrial research to 25
percent for experimental development.
Source: European Commission 2013; Dressler 2013.

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56 U r b a n C h i n a
are better administered nationally. But this
means that grants from the central govern-ment
are needed for the subnational govern-ment
to make ends meet. A better system
would ensure that a considerable portion of
local expenditures are financed by local taxes
under the control of local government. This
system would impose financial discipline on
local governments because the imposition
of local taxes could be directly linked to the
appointed local leadership, thus increasing
their accountability to residents of the local-ity
they administer. Further, a tax on those
who benefit from locally provided services
would lead local governments to align the
benefits and costs of public spending. Finally,
local governments are best served by a tax
base that is relatively stable, because they
usually have more limited access to financing
than the central government does and, unlike
the central government, have no role in mac-roeconomic
stabilization policies.
A property tax on housing would provide
a stable source of local government revenue
that is aligned with service delivery benefits.
Property taxes are a mainstay of local gov-ernments
in both developing and developed
economies. A property tax can fulfill two
important objectives in China: it can be
both a quasi-user charge for urban services
and a tax on wealth holdings in real prop-erty.
Property taxes are never popular with
constituents, but that is part of the rationale
for those taxes: if local governments want to
spend more, the burden is on them to argue
their case to the taxpayers. Property taxes
allow local government budgets to benefit
from increased land values in their jurisdic-tion,
thus rewarding good administration
by local leaders. In addition, property taxes
would encourage property owners to make
the best possible use of their property—for
instance by renting out apartments or devel-oping
unused or underused land, thus pro-moting
better use of the housing stock and
urban land. China should aim to make prop-erty
taxes an important part of local govern-ment
revenues. Even so, property taxes will
not be able to fully replace current land reve-nues:
in developing countries, property taxes
usually raise less than 1 percent of GDP, and
even this level will be reached only over time
as administrative capacity increases. Further,
transitional arrangements may be needed,
which would limit revenues in the short run,
including a grace period of two or three years
that would allow people to adjust their hold-ings
of real estate before the tax takes effect.
The tax should be broadly based to achieve
its revenue goals and incentives; the current
experiments in Chongqing and Shanghai are
too narrow to be of much consequence, and
a national system of property taxes should be
more ambitious in its goals. China is steadily
moving toward legislation on property taxes
while also improving the local taxation sys-tem
and developing mainstream taxes for
local governments. The share of property
taxes will eventually increase and is expected
to exceed 1 percent of GDP, as administrative
capacity increases.
Other local revenue sources have consider-able
potential. Some cities such as Shanghai
already auction car license plates, which lim-its
car use to sustainable levels. Higher vehicle
registration fees and excise taxes on fuels can
be implemented with special arrangements
for public transport to limit impact on pub-lic
transport prices. Local income and sales
taxes could be charged in the cities where jobs
are located and consumption occurs.
Increasing the prices of urban services
such as mass transit, solid waste collection,
water, wastewater, power, and gas to full
cost recovery levels would enhance service
sustainability and raise revenues. Interna-tionally,
the use of charges for government
services of a largely individual nature is com-mon,
and in high-income economies, those
charges often cover full costs—that is, the
costs of operating and maintaining the ser-vice,
and a capital charge to pay for depre-ciation
and profits. Excise taxes on fuels,
electricity, and water could be imposed to
include the environmental impact of their
use. Lifeline pricing for the poor, who would
pay less for a limited amount of service,
could be used to meet the government’s dis-tributional
objectives. And while full-cost
pricing for mass transit is rarely achieved
internationally, China could gradually
increase pricing as the cost for individual pri-vate
transport increases as a result of higher
taxes and levies.

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Alternative local revenue sources can yield
considerable revenues. Revenue from the
property tax in advanced economies gen-erally
ranges from 1 to 4 percent of GDP
(more than 3 percent in the United States and
more than 4 percent in the United Kingdom).
Environmental taxation in OECD countries
averages 6 percent of revenue (as high as
15 percent in Turkey) and nearly 2 percent
of GDP (more than 4 percent in Denmark).
Congestion charging could raise additional
funds. After the introduction of Singapore’s
Electronic Road Pricing System in 1998, traf-fic
levels decreased by 15 percent, and annual
revenue exceeded $50 million. The 2008 rev-enue
from London’s congestion-charging sys-tem
reached $435 million, or nearly 9 percent
of the local transport authority’s revenues.
Property taxes and additional environmen-tal
taxation and pricing in China could raise
significant additional revenue (2–5 percent of
GDP annually, in line with OECD countries).
China’s tax structure could be further
improved to meet the government’s objec-tive
on economic structure. One important
step would be to replace the business tax
on services with a VAT, a step that authori-ties
have already initiated. This move would
encourage the growth of a services industry,
because the VAT on services can be deducted
from the user’s VAT tax obligations. It would
also encourage enterprises to outsource ser-vices
to more specialized enterprises, because
there would no longer be a tax advantage for
keeping services in-house. At the same time,
the business tax is a major source of local
government revenue, and lost revenues would
need to be replaced, either through more local
taxes such as the property tax, through a
larger revenue share for local government, or
through the grant system. In addition, scope
and coverage of consumption taxes can be
adjusted. Taxes on high-polluting industries
and energy-intensive products as well as on
some high-end consumer goods and services
subject to a higher rate of tax could be further
studied.
Reforming the revenue-sharing system
Achieving greater clarity in the division of
functional responsibility among the various
levels of government would improve effi-ciency,
because reducing overlap could save
costs and reduce unproductive coordination
efforts. More broadly, clarity on expendi-ture
assignment is required to ensure that
resources are available at the level of gov-ernment
responsible for delivering a specific
service. In China, local governments perform
some functions that would be better adminis-tered
by the central government, most impor-tant
among them, pensions. Centralizing the
administration of pensions would improve
labor mobility, allow national standard set-ting,
and address important problems related
to risk pooling.
China’s revenue-sharing system could
be considerably improved by removing the
incentive for local governments to hold on
to inefficient enterprises for revenue rea-sons.
The major shared taxes (VAT, corpo-rate
income tax, and personal income tax)
are shared with the local governments based
on the location of collection. This arrange-ment
distorts the allocation of resources in
two ways: it encourages local governments
to keep enterprises that should move to new
locations; and it disproportionately benefits
large cities, because these are often the loca-tion
of a firm’s headquarters and frequently
where the firm pays taxes. The distribution
of revenue sharing among provinces could
begin moving toward a formula-based system
in which central transfers would be allocated
among subnational governments according
to objective measures of need rather than the
location of tax collection. A start could be
made by changing the way the VAT is shared
with local governments, from one based on
the location of the VAT collection to a sys-tem
that recognizes the place of consump-tion.
Countries with a shared VAT usually
follow one of two practices: either they do
not explicitly share the VAT with subnational
governments, or they share the tax on an
objective basis such as population (Germany)
or consumption (Japan). The lost revenues in
some of the higher-income provinces would
be replaced by increased local taxes. Over
time, a uniform sharing rate for all shared
taxes could be introduced.
Even with enhanced local government
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58 U r b a n C h i n a
gap between expenditure responsibilities and
the local government’s own and shared rev-enues.
The transfer system should ensure the
capacity of local governments and encourage
them to deliver on national priorities. China’s
current transfer system has been increasingly
effective: transfers have been growing rap-idly,
and have increasingly been allocated to
poorer provinces, for purposes of national
priorities. At the same time, with some 200
specific grants to local governments, the sys-tem
is complex and expensive to administer
and undermines local government account-ability
and autonomy. In contrast to specific
grants, the general grant, which is intended
to equalize revenue capacity among localities
and ensure basic service delivery, accounts for
a little less than half of total transfers. The
current transfer system is also less responsive
to changing circumstances, especially to the
movement of people to a new locality, and
the central government has therefore started
to provide additional grants to local govern-ments
to deliver services to migrants. In the
short run, China could consider consolidat-ing
many of the specific grants into a limited
number of sectoral block grants that would
need to be linked to the central government’s
broad objectives and be supported by a sys-tem
of performance indicators and review.
In the medium term, China could dis-tribute
grants using a formula based on fis-cal
capacity and expenditure needs. Such
systems are used in many OECD countries,
with Australia managing a sophisticated
system for determining expenditure needs.
This system would fit China’s objective to
provide a minimum standard of public ser-vices
across the country over time. Expendi-ture
needs would be defined by the costs of
the minimum standard, and converting the
current tax sharing and grants system into a
formula-based grants system would consider-ably
alter the outcomes for individual local
governments. Therefore, this change should
be implemented gradually and aligned with
the introduction of new local taxing pow-ers.
For example, local governments could
be assigned a “target share” based on objec-tive
criteria of expenditure needs and revenue
capacity, but they would receive this share
only incrementally, starting from their cur-rent
share in the grant pool.
Subprovincial finance would need to be
reformed to ensure resources get to where
they are needed. Adjustments in central-provincial
fiscal relations alone do not ensure
that adequate resources would be available
to accommodate the budgetary impacts of
urbanization. In fact, adjusting intraprovin-cial
inequalities in fiscal resources will likely
have greater impact than interprovincial
disparities. Subprovincial revenue-sharing
arrangements vary widely from province to
province with little mandatory controls set in
place by the central government—a feature
that is usually observed in federal countries
but not in unitary ones.
Reforming land finance
Revenues can be generated from existing
urban land by introducing new means of cap-turing
value from land development. Reallo-cation
of land from industrial use to housing
or commercial use promises higher revenues,
given the shortage and higher prices of the
latter two. Furthermore, betterment taxes
can be imposed on those that see the value of
their property rise because of infrastructure
development. Also, auctioning the develop-ment
rights for urban land, separate from the
land lease, could raise revenues and accelerate
urban renewal. Finally, a VAT on land, prop-erly
restructured, could capture some of the
capital gains of land transactions in which
local government is not directly engaged (box
O.10).
Regulatory rules need to ensure that land
financing can continuously play a role in
financing urbanization and that fiscal risks
are better managed. The first priority would
be establishing uniform reporting require-ments
for subnational land ownership, land
sales, contributions of land to public-private
ventures, land transactions between differ-ent
types of subnational institutions, and
revenue generated by land sales. Second, the
“golden rule” of public finance should be
applied to subnational land financing—that
is, land asset sale proceeds should be used
only to finance investment. Third, borrow-ings
backed by land collateral may require
regulation to set minimum collateral or loan
ratios and to prescribe land valuation prin-ciples.
Fourth, transfer of surplus land to

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BOX O.10 Land value capture
Value capture allows the government to capture
at least part of the increase in land value resulting
from land improvements, for instance infrastruc-ture
expansion. A prerequisite is that infrastructure
must generate sufficient value to be captured. China
has been successful in capturing increments in land
value, but the key challenge is to set a rule to allow
all people to share the development outcomes as well
as the risks. The rule should be economically justi-fiable,
incentive compatible, and acceptable to the
public. A number of value-capture instruments and
other financial mechanisms are being applied interna-tionally
(Smolka and Amborski 2007; Peterson 2008;
Miller and Hale 2011). The most prevalent and effec-tive
of these include:
Property taxes: Annual imposition of taxes on
the value of urban land and buildings. These taxes
are among the main revenue sources for local gov-ernments
other government units or enterprises, pri-vate
developers, or public-private partner-ships
should be prohibited except on a fully
disclosed contract basis.
Strengthening public financial
management
Financial management needs to be improved
and transparency increased. Formulating and
implementing urban plans in a fiscally sound
manner would benefit from a medium-term
expenditure framework system, which could
strengthen capital spending by facilitating
multiyear funding programs and by incor-porating
maintenance and operating costs
of investments into expenditure projections.
Independent audits of subnational financial
accounts, periodic public disclosures of key
fiscal data, exposure of hidden liabilities and
guarantees, and moving off-budget liabili-ties
onto the budget would all increase fis-cal
transparency. Finally, establishing a chief
financial officer (CFO) for local governments
would centralize the accountability for local
government finances in one office, clarify
authority on financial management matters,
and halt the decentralized and uncoordinated
issuance of local government debt. Ideally,
the CFO should come from the department
that manages the public purse or from its
supervisor’s office (the mayor’s office). The
CFO’s office would coordinate with the bud-get
department, the treasury department,
the investment administrator (Development
around the globe.
Special assessment districts: New and special lev-ies
on properties that will benefit from the provision
of new or upgraded infrastructure services (exam-ples
in the United States are 17 percent of the first
phase of the Portland streetcar system; 50 percent
of the capital costs of South Lake Union streetcar
system in Seattle; and 28 percent of the cost of the
new New York Avenue Metrorail station in Wash-ington,
DC).
Tax increment financing: This approach dedi-cates
future tax increments within a certain defined
district to finance debt issued to pay for a project,
which theoretically will create the conditions for
future gains (used primarily in U.S. cities).
Transit-oriented development or joint development:
Given that transit infrastructure plays a critical role in
the end value of development projects, the capture of
profits from activities associated with real estate devel-opment
in and around transit stations may allow a
transit agency to deliver an operating ratio in excess of
100 percent (as in the case of Hong Kong SAR, China,
MTRC). The approach that MTRC uses is described as
the “Rail + Property model.” Joint development, simi-larly,
can be described as a real estate development proj-ect
that involves coordination between multiple parties
to develop sites near transit, usually on publicly owned
land (examples are the Land Transport Authority and
SMRT in Singapore, BART in the San Francisco Bay
Area, and the Transport for London Crossrail project).
Developer charges or development impact fees: A
one-time and up-front charge requiring developers to
make cash or in-kind contributions to on- and off-site
infrastructure in return for permission to develop or
build on land. These may be stipulated through sub-division/
development agreements via some norm or
expectation, or they may be negotiated on an indi-vidual
basis. The charges defray the cost of expanding
and extending public services in a particular area. For
example, in Broward County, Florida, the local gov-ernment
implemented a transit-oriented concurrency
system.

88.
60 U r b a n C h i n a
and Reform Commission), and other gov-ernment
agencies on the borrowing strategy
and plan. A debt issuance plan and a budget
plan would be submitted to the local People’s
Congress for approval and disclosed to the
public. The central government would need
to play a major role in enforcing compliance
with the framework for local borrowing.
Promoting public-private
partnerships
China has already developed a policy frame-work
for procuring services from the private
sector—a positive signal for private providers
of public services. More can be done, however,
to improve policies and incentives for the pri-vate
provision of public services. China still
has scope to tap into private investment in the
construction of urban infrastructure and the
delivery of urban services, and a policy and
legal framework should be developed to fully
capture the benefits of public-private partner-ships
(PPPs). Since 1990, China has had more
than 1,000 PPP transactions in infrastructure
(transport, water, energy) for a total value of
US$166 billion;55 yet Brazil and India have
had much larger private investments in infra-structure
during the same period—$325 bil-lion
and $273 billion, respectively. To simplify
the project approval system and facilitate pru-dent
decision making at the local level, PPP
laws and regulations could be unified at the
national level to provide uniform guidance
about approval processes across sectors and
regions and contractual dispute resolution.
Governments should make policies and create
the incentives for participation by the private
sector and also develop a system for guiding
and regulating the partnerships. Legal safe-guards
represented by effective application of
the rule of law, regulatory oversight, and dis-pute
resolution systems would encourage pri-vate
participation.
China may shift the focus of PPP con-tracts
from capital financing toward service
provision by bundling investments for asset
creation with operation and maintenance
requirements over a long period of time (20
years, for example). PPPs for most types of
urban infrastructure and service delivery will
depend on local government payments over
the lifetime of the contract. In these cases,
local governments should be allowed to make
multiyear financial commitments. Future
financial contributions to PPPs need to be
kept to a fiscally sustainable level, and the
best way to do that is to ensure they are kept
within the expected, future level of recurrent
revenue.
Expanding PPPs will increase govern-ments’
contingent liabilities, and careful risk
assessment and proper risk sharing is needed.
The rules governing PPPs should ensure that
officials in charge are given incentives and
have information and the capability to take
account of the costs and risks of contin-gent
liabilities. PPP contract arrangements
should clarify risk-sharing arrangements. To
strengthen institutional capacity, special PPP
units may be established at the local level,
while risks arising from fiscal commitments
should be managed independently. Local
governments could introduce a competitive
mechanism along with innovative modes of
operation to promote openness, transpar-ency,
and efficiency. To open competition in
the infrastructure sector, public utility agen-cies
should be restructured with transparent
financial cost reporting, subsidies received
from the budget, and the quantity and qual-ity
of services.
Improving the policy framework
for debt finance
Stable and sustainable debt finance remain
critical for China’s urbanization, as long-lived
assets such as infrastructure can best
be paid over time, because it is an efficient
means to match payment for an asset with
its lifespan. However, local government debt
has triggered macroeconomic crises in other
countries in the past, including Argentina,
Brazil, and the Russian Federation. There-fore,
allowing local governments to borrow
requires a rigorous regulatory framework,
which, together with financial markets,
should discipline subnational borrowing to
ensure sustainability. China’s capital mar-kets
are still evolving; thus it is important to
establish a framework to regulate subnational
government borrowing, while promoting a

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competitive and diversified subnational credit
market.
China should impose fiscal rules and debt
limits on borrowers so as to manage, ex ante,
the risks of systemic defaults. Many countries
allow local governments to borrow against
general budget revenues or dedicated revenue
streams (revenue bonds), either directly by the
local government or through a special entity
created to operate a service. A basic approach
adopted by many countries is the “golden
rule”—borrowing is allowed only for long-term
public capital investments. Debt limits
should be imposed on individual municipali-ties
and collectively for all local governments.
The threshold for debt indicators must take
into account the total fiscal space available
for the public sector, at national and subna-tional
levels. Borrowings by entities that pro-vide
essential public services would also be
subject to sector-specific limits with respect
to debt service capacity. In addition, rigorous
creditworthiness assessment by credit-rating
agencies needs to be a precondition for local
government access to the capital market.
Among other things, this assessment would
require full disclosure of independently
audited public financial accounts, thereby
strengthening the role of markets in fiscal
monitoring and surveillance.
An insolvency framework is required to
make a no-bailout commitment by the cen-tral
government credible and to set clear
rules for debt workout if a local government
becomes over-indebted. A sound framework
should reduce the moral hazard of subnational
defaults, discourage free riders, bind all local
governments to pursue sustainable fiscal poli-cies,
and extend their short-term horizon to
minimize the impact of unsustainable fiscal
policy on future generations. Local govern-ment
finance vehicles that finance and imple-ment
public infrastructure projects could be
transformed into special-purpose entities,
while pure financing vehicles can be dissolved
once local governments have formal and open
access to markets. These special-purpose
entities should divest their commercial activi-ties,
in line with the direction of refocusing
the government on essential public services,
and be reformed to become transparent and
financially stronger. They would follow
international good practices on corporate
governance and financial auditing and report-ing.
The fiscal relationship between the bud-get
and the special-purpose entities should be
disclosed to the public. Because their borrow-ings
constitute contingent liabilities of local
governments, regulations on the purpose, pro-cedures,
and limits of borrowing need to be
developed. Finally, while an overall local gov-ernment
debt level of 25–30 percent of GDP
is not excessive, various localities or local gov-ernment
financing vehicles have experienced
debt service pressures and may need a debt
workout under clear rules to be established.
Developing competitive and diversified
funding sources for infrastructure financing
will help lower financing costs. Aside from
land revenue, China’s infrastructure financ-ing
has been dominated by commercial and
government policy banks—the shortcom-ing
being the potential mismatch between
the terms of commercial banks’ liabilities
and assets. In the short run, commercial
and policy banks will continue to provide
large amounts of financing to local govern-ments
and financially viable special-purpose
“public service companies.” In the medium
term, the development of a local government
bonds market is feasible and desirable. The
regulatory and institutional frameworks for
all sources of finance need to be harmonized
to create a level playing field. This will dis-courage
shadow banking, improve the qual-ity
of local government debt financing, sup-port
sound financial innovation, and ensure
transparency, market-based price formation,
and protect investors’ rights across the whole
spectrum of financial instruments. All these
aspects would foster long-term debt market
development and enhance financial system
stability and the efficient channeling of sav-ings
into long-term financing for urban infra-structure
on a sustainable basis.
A coherent set of securities regulations is
required to develop a subnational bond mar-ket.
Securities regulations and the institu-tional
infrastructure for bond issuance and
trading, such as regulation of credit-rating
agencies, broker-dealers, underwriters, and
auditors, are similar to those for sovereign
and corporate bonds. China needs to build a
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market, standardize the accounting rules for
public sectors, and improve fiscal transpar-ency.
China has already experimented with
local government bonds: the central govern-ment
has issued bonds on behalf of some
local governments, and six provinces and
municipalities have issued bonds at their own
discretion. Broadening the direct access of
local governments to the local government
bond market should proceed as rapidly as
additional provinces and municipalities can
obtain credit ratings to demonstrate their
credit­worthiness
and to develop the techni-cal
capacity to manage and issue debt. Having
the Ministry of Finance issue local govern-ment
bonds on behalf of local governments
could be phased out or substantially changed
by establishing equal rules as those for direct
municipal issuance (such as creditworthiness,
transparency, credit rating, no implicit guar-antee,
and the like).
Bank lending to local governments should
be regulated in a way that reinforces local gov-ernment
budget discipline and fiscal transpar-ency.
Commercial bank lending is normally
bound by general prudential rules, which, if
applied to local governments, would restrict
local governments’ opportunity to borrow.
Such rules include exposure limits, which
limit a bank’s loan exposure to a single cli-ent;
concentration limits, which limit a bank’s
exposure to a certain type of client such as all
local governments taken together; and insider
lending restrictions, which limit lending to
the owners or co-owners of the bank. China
has such rules in place, but the authorities
would need to ensure effective enforcement.
In addition to these norms, many countries
have found innovative measures to reinforce
discipline. For instance, after experienc-ing
widespread subnational defaults, several
countries including Brazil banned subnational
ownership of financial institutions altogether.
In China, direct local government ownership
is limited, but influence is exercised through
key personnel decisions in banks—a system
that China needs to review to ensure inde-pendent
decisions on lending to local govern-ments.
In Mexico, competitive lender selec-tion
and transaction ratings were required
for large-scale long-term financing. Although
these requirements are not mandatory, bank
lending to nonrated subnational governments
would need to have a high capital adequacy
ratio.
Shadow banking would need to be regu-lated
to limit the availability of easy money
to local governments. In recent years, local
government financing vehicles have increas-ingly
relied on funding from shadow bank-ing’s
wealth management products and trust
fund loans. These vehicles enabled local gov-ernments
to obtain off-budget financing, but
their benefits as flexible financing vehicles
started to be outweighed by the low level of
transparency, the potential impact on contin-gent
liabilities for local governments, and the
risks to investors and ultimately the banks
that manage much of the shadow banking.
To regularize shadow banking, all asset
management products should be subject to
the same fundamental regulatory standards.
Regulatory policy for all collective invest-ment
products should be coordinated among
government agencies, including the China
Banking Regulatory Commission, the China
Securities Regulatory Commission, and the
China Insurance Regulatory Commission.
A plan for reforming the legal and regula-tory
framework of shadow banking would
have to be formulated, including short-term
amendments of regulations and long-term
amendments of primary legislation. Invest-ments
in wealth management products,
trust funds, or other collective investment
schemes should not be protected by implicit
guarantees.
The role of policy banks in the provision of
long-term finance should be strengthened to
complement the shortage of supply for long-term
market-based financing. Policy banks
within the legal and regulatory framework
could play a positive role in supporting the
use of long-term capital market instruments
through the issuance of innovative financial
instruments that would support the growth
of fixed-income markets; provide guarantees
for local government bonds; and purchase
a limited portion of new local government
bond issues, thus serving as a market maker
by buying or selling bonds as needed by other
investors.

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Chapter 9 Promoting Greener Urbanization
The context of the reforms
A sustainable city is one where environmen-tal
objectives are placed on an equal footing
with economic growth and social inclusion,
and sector policies are aligned with these
strategic objectives. More sustainable cit-ies
are also more efficient: incorporating the
losses from environmental damage into eco-nomic
decisions will lead to more efficient
outcomes. Further, as China becomes more
prosperous, its population will increasingly
demand a clean and healthy living environ-ment,
and livability will become a key factor
in the locational decisions of foreign inves-tors.
Managing environmental pressures is
essential to realizing denser, more efficient
cities in which agglomeration effects are fully
captured. More sustainable cities are more
equitable, as environmental damage is pre-dominantly
inflicted on the less affluent.
The most important task for achieving
greener urbanization is to strengthen green
governance—the institutions, incentives,
and instruments that enable effective envi-ronmental
management. Moreover, inter-jurisdictional
approaches are needed because
some challenges like air and water pollution
transcend jurisdictional boundaries. Apply-ing
principles of green governance in sector
policies would facilitate reforms, some dif-ficult,
that are needed to achieve resource-efficient
cities with low pollution. Facilitated
by land, fiscal, and social reforms, needed
urban infrastructure reforms across urban
planning, transport, energy, buildings, water,
and solid waste range from the mundane—
such as better landfill management—to the
monumental: dramatically switching energy
away from coal toward natural gas and
renewable energy.
Strengthening green governance
Stronger incentives are needed to elevate
green objectives to the level of economic
growth and social goals for local government
officials. Just as reduction in energy intensity
has been a strict performance criterion for
several years, greater weight can be given to
other environmental criteria, including mak-ing
them binding targets. Because conditions
vary greatly across cities, benchmarks need
to be locally appropriate, focusing on basic
pollution reduction in cities dominated by
heavy industries, and emphasizing broader
quality-of-life issues in already greener cit-ies.
Inclusion of these targets in the system
for evaluating local officials would reinforce
their importance. Moreover, longer tenure
for local officials would also encourage urban
management that focuses on the longer term,
within which results on green objectives can
be achieved.
Greater authority and human resources
are needed for environmental enforcement.
China’s environmental management insti-tutions
are often understaffed and lack suf-ficient
authority vis-à-vis local governments
responsible for development. To improve
environmental enforcement, China could
consider a system in which the Ministry of
Environmental Protection (MEP) would be
responsible for enforcing national laws and
regulations and would exercise stronger over-sight
over local environmental protection
bureaus (EPBs). At all levels, environmental
management institutions would need greater
authority and independence when dealing
with other ministries, local governments,
state-owned enterprises, and private com-panies.
To avoid conflicts of interest, EPBs
should be funded from the general budget,
independent of the collection of pollution fees
and fines.
Environmental policies currently favor
regulatory measures and targets, but in the
future sharper and more market-oriented
instruments can be used, and the cost of
natural resources and environmental services
can be made explicit even if funded out of
general revenue. Raising prices to cost-recov-ery
rates is most urgent in water supply, sani-tation,
and waste management. Cross-subsi-dies
in the energy sector, which mainly favor
residential consumers and discourage end
use efficiency, could be reduced to avoid ben-efit
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targeted support to protect the poor from
price increases.56 Pricing for private vehicle
transport can increasingly cover social costs
including climate change impacts. The choice
of carbon-pricing instruments (such as car-bon
taxes versus a cap and trade system) will
influence the established energy efficiency
and renewable energy policy framework.
Strong energy policy coordination is needed
to ensure consistency. The outcome needs to
give a credible signal to investors, producers,
and consumers that there will be a long-term,
stable policy of increasing the price on pol-lution
and harmful use of natural resources.
More channels for public participation
and involvement of the judiciary would allow
citizens affected by environmental problems
to help the government monitor, enforce, and
shape environmental policies. While envi-ronmental
enforcement agencies have lim-ited
resources in all countries, most rely on
assistance from the public, especially through
environmental NGOs, not only for monitor-ing
and environmental impact assessment,
but also policy development. Other countries
also allow the use of public complaint mecha-nisms
and legal proceedings to hold polluters
to account. Expanding China’s experiments
with environmental courts could be an effec-tive
step forward, including allowing third
parties to sue polluters. Overloading the judi-cial
system can be avoided by strengthening
other mechanisms of environmental dispute
resolution (such as specialized panels or tri-bunals)
and through adequate safeguards to
avoid frivolous lawsuits. To facilitate citizen
involvement, promising new efforts in dis-closing
environmental information could be
expanded. Polluting facilities should be held
responsible for accurately reporting harmful
emissions, along the lines of the U.S. Toxic
Release Inventory or the European Union’s
Pollutant Emission Register. Currently
there are too many exceptions that restrict
disclosure.
Energy analysis could be incorporated into
different stages of urban planning to opti-mize
energy use. Rather than focusing solely
on building-level or sector-based improve-ments,
piloting systematic analysis of demand
and energy resources in a city, and also at the
neighborhood level, can lead to management
mechanisms that strengthen coordination
and reduce the cost of energy investments
and to policies to promote least-cost clean
energy solutions. A number of planning and
priority-setting tools, such as energy mapping
and marginal abatement cost analysis for
low-carbon cities, could help municipal gov-ernments
apply low-carbon principles, even
at the neighborhood scale.
Greening across jurisdictional
boundaries
Air quality management is making progress
but regional solutions are needed to address
the most severely polluted airsheds. Air pollu-tion
management continues to be the respon-sibility
of individual local administrations,
without sound mechanisms for coordination
across boundaries. Regional institutions,
perhaps modeled on the Southern California
Air Quality District or similar agencies in
Europe, would be better suited to design and
implement abatement policies. Such institu-tions
should be given real authority (either
regulatory or by allowing them to use the
court system for enforcement), which may
require provincial or national government
leadership. In addition, China’s state-of-the-art
air quality management technical capacity
in public and academic institutions could be
better used to conduct not only policy analy-sis
but also comprehensive impact evaluation
and cost-benefit analysis where many abate-ment
programs currently fall short. Large-scale
pilots, such as in the Jing-Jin-Ji (Beijing–
Tianjin–Hebei) region, could help develop
institutional and technical approaches for
better air quality management.
Water quality management will need to
be strengthened to resolve tensions between
urban and rural water demand, especially in
China’s water-scarce north. Regional pilots
to develop watershed-level governance of
water rights and pollution allowances using
advanced water consumption monitor-ing
approaches show promise. They could
be improved by strengthening the author-ity
of watershed management institutions,
first by replicating successful river-basin
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93.
o v e r v i e w 65
have coordinated integrated environment
and water management plans at local levels.
Watershed authorities could facilitate greater
use of ecosystems payments, under which
downstream users compensate upstream
farmers or industrial users to maintain water
quality. Water rights trading, which has
been used successfully in other water-scarce
regions such as the western United States and
Israel, could also be piloted. Both require
interjurisdictional coordination of financial
flows, appropriate financial controls, and
oversight.
Greening sector policies
Providing sustainable urban
transportation
Despite modernization of the vehicle fleet and
massive transport investments, mitigating the
sector’s increasing contribution to air pollu-tion
and urban congestion is needed. Improv-ing
traffic demand management to reduce
the growth in private car use and promote
a shift to public and nonmotorized trans-port
are two key priorities. Most important
is to charge drivers the costs in full of using
private vehicles, and that covers the environ-mental
and social costs, which include road
pricing or congestion charging, and registra-tion
and parking fees (such as higher fees for
polluting vehicles). Fuel costs (higher than in
the United States but lower than in the Euro-pean
Union) could be gradually increased.
Fee revenues can be invested in more effi-cient
and convenient public transit to replace
trips in private cars. Subsidies for public tran-sit
will likely still be required, but they are
justified by the public health damages and
congestion costs they avoid.57 Urban land use
planning and zoning that promotes transit-oriented
development and nonmotorized
transport (walking and biking) will encour-age
modal shifts. In China’s existing and
emerging metropolitan areas, transport—like
air pollution—needs to be managed region-ally.
Metropolitan transit authorities that
address coordination issues are common in
many cities globally.
Emission reduction measures targeting the
most polluting vehicles are needed. So-called
“yellow-label” cars, which account for 13.4
percent of the total vehicle fleet, are respon-sible
for 81.9 percent of particulate matter,
58.2 percent of nitrogen oxides (NOx), 56.8
percent of hydrocarbons (HC), and 52.5
percent of carbon monoxides (CO) emitted.
The phase-out of yellow-label cars should be
accelerated using a market-based approach.
The program to trade in old cars for new
cars should be continued. The scope of subsi-dies
to energy-efficient and green cars should
be broadened. Collecting emission fees on
vehicles and applying differential toll rates
for roads, bridges, and highways should be
studied and potentially made into policies.
Consumers buying and producers manufac-turing
vehicles with stricter emission stan-dards
should be given incentives. Incentives
for phasing out yellow-label cars should be
implemented; for example, business opera-tors
that replace their yellow-label cars could
receive rewards in lieu of subsidies. The sup-ply
of diesel and gasoline with lower sulfur
levels should be increased. Institutions should
be given greater authority to enforce emis-sions
standards.
Cleaner energy
Globally, no other modern cities rely on coal
for their energy needs as much as many Chi-nese
cities do, and reducing its use should
be the centerpiece of urban energy strate-gies.
While shifting the economic structure
to industries that are less energy intensive
and more high value added and service ori-ented
can help over the long term, reducing
energy demand is a priority. The scaling
up of cost-effective local clean energy pro-duction
and importation of cleaner energy
from outside city boundaries can be key
elements of this strategy in the short and
medium term. Cleaner natural gas can be a
viable alternative to coal as production and
imports continue to be scaled up. Conversion
can be accelerated with more competition in
upstream development and greater invest-ment
in transmission, distribution, and stor-age
by introducing third-party access to the
gas market, continuing pricing reforms, and
introducing modern sector regulation. Given
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66 U r b a n C h i n a
to prioritize gas usage in the residential,
heating, and commercial sectors where it
will have the largest environmental and eco-nomic
benefits. These three user types would
require slightly less than 200 billion cubic
meters by 2030 to achieve universal residen-tial
access and about 60 percent gas-based
centralized heating supply, compared with
total consumption of 130 billion cubic meters
in 2011. Because the power sector and large-scale
energy consumers will rely on coal for
longer, strict enforcement of emissions con-trol
standards and efficiency improvements
are needed.
In the longer term, China’s cities need to
increasingly rely on renewable energy sources.
Supply will come from large-scale produc-tion
outside city limits, which will require
the removal of barriers related to pricing and
grid access for commercial renewable energy
producers. Over time, establishing efficient
mechanisms for regulating, metering, and
financing distributed power generation from
renewable sources and natural gas distribu-tion
will promote their use. China’s coal-reliant
district heating sector contributes sig-nificantly
to China’s wintertime air pollution
and requires urgent attention. In addition to
switching to gas, the current area-based billing
system for district heating services contradicts
China’s concerted energy conservation poli-cies.
Pricing and consumption-based billing
reforms supported by national regulations that
sharpen regulatory tools such as licensing and
enforcement could facilitate improvements
across China’s northern provinces. Building
retrofit programs, which are increasing in
scale in China, could accommodate district
heating sector reform by setting a mandatory
deadline for the introduction of consumption-based
billing after retrofitting or by consider-ing
building-level metering for buildings with
reasonable energy performance.
Rebalancing markets and mandates to
reduce energy use in industry
Improving energy efficiency in industry has
been largely successful, but additional prog-ress
that is still urgently needed will become
increasingly harder to achieve without
rebalancing administrative measures with
market-based approaches. As demand growth
for heavy industrial goods slows, compa-nies
may find cost-reducing investments in
energy efficiency more attractive. Raising
energy-related taxes and defining a carbon-pricing
strategy (by the 13th Five-Year Plan)
would motivate enterprises to seize efficiency
opportunities for their own business inter-ests.
Associated revenues could be recycled
to provide stable, multiyear financing of
energy efficiency programs. The energy sav-ings
agreement system has been effective and
can be continued, but allowing enterprises
to achieve targets either through their own
improvement or by trading energy savings
certificates from other companies would be
more efficient. Third-party technical service
providers for energy efficiency audits, new
fixed asset energy assessments, and similar
projects can be fostered as part of a greater
energy efficiency services industry that would
offer better financing and customized busi-ness
models, including energy services perfor-mance
contracting in enterprises. Cities must
continue to be innovation drivers in energy
efficiency policies and programs, encouraging
the incubation of energy efficiency services
through knowledge exchanges, local associa-tions,
promotion, and market development.
Serving the people in more efficient
and cleaner buildings
The public sector should lead by example
by addressing energy efficiency in the stock
of public buildings. Procurement of energy
savings performance contracting for pub-lic
institutions would promote the market
for energy efficient and green buildings and
products, lowering costs over time. Monitor-ing,
rating, and publicly disclosing building
energy performance can be effective motiva-tional
tools. Energy performance targets for
residential and commercial buildings should
be set to define “low-energy building” stan-dards.
Time-bound targets would set clear
expectations for performance improvement,
encouraging innovation in the marketplace
and guiding refinement of building energy
efficiency codes and standards. In addition

95.
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to using stricter codes to set “the floor,” suc-cessfully
achieving advanced green build-ing
ambitions will require a larger effort in
developing capacity across the supply chain
(from design to materials to construction).
Finally, to reduce the use of harmful build-ing
materials in China, improved monitoring
and enforcement of standards are required,
together with a labeling system possibly mod-eled
after Germany’s “Blue Angel” system.
Integrating water supply and pollution
management
Reducing urban water demand and strength-ening
the financial health of the water and
sanitation sectors are two of the most impor-tant
tasks for accommodating greater num-bers
of residents and businesses in cities with
water quality and scarcity problems. China’s
water and wastewater tariffs are low by inter-national
comparison (figure O.11). Setting
cost-recovering tariffs and completing water
metering will encourage water-saving behav-ior
and generate resources to sustainably fund
water and wastewater management. Support-ive
tariff policies should be complemented
with reform of the water utility governance.
Integrating drainage and treatment services,
piloting water boards in larger cities, and
consolidating smaller utilities in nearby cit-ies,
possibly through concessions, are needed
to achieve scale economies and improve man-agement.
While water treatment and waste-water
standards are essential, one-size-fits-all
regulations result in oversized infrastructure
and raise compliance costs that some weaker
cities find difficult to meet. A recent study of
655 utilities and local governments estimates
that 85 percent of water treatment plants are
seriously oversized and that the maximum
daily water supply was less than 50 percent of
production capacity of facilities.58
Getting the fundamentals right in
solid waste management
Inadequate cost recovery hinders expan-sion
and improvement of solid waste collec-tion,
recycling, and disposal systems. About
RMB 200 billion nationally will be needed
FIGURE O.11 Water and wastewater tariffs
0
Copenhagen, Denmark
Berlin, Germany
Zurich, Switzerland
Luxembourg, Luxembourg
Sydney, Australia
Paris, France
Singapore, Singapore
London, United Kingdom
Barcelona, Spain
New York, United States
Stockholm, Sweden
Rome, Italy
Moscow, Russian Federation
Kiev, Ukraine
Hong Kong SAR, China
Beijing, China
Kuala Lampur, Malaysia
New Delhi, India
Riyadh, Saudi Arabia
1 2 3 4 5 6 7 8 9 10
US$/m3
annually in the coming years, increasing
to more than RMB 400 billion, to manage
waste projections for 2030. Yet, waste ser-vice
charges make up only about 10 percent
of real costs, which is concerning for a sector
with high marginal operating costs. Subsidies
should (partially) be phased out over a period
of five to ten years while payment mecha-nisms
are introduced (that is, combined with
other utility charges) to create incentives to
reduce waste, recycle more, and operate sys-tems
more efficiently and effectively. Recy-cling
in China is widespread but informal.
Formalization could yield revenue to finance
waste management but would threaten the
livelihoods of low-income collectors of recy-clable
materials and thus requires careful
calibration. With sector reforms to establish
good fundamentals, product stewardship
programs could be introduced so that man-ufacturers
take responsibility for life-cycle
waste generation including packaging mate-rials
and final disposal. This program could
start with voluntary schemes leading to pub-lic-
private cooperation, as in other countries.
9.07
6.67
5.52
5.50
4.26
4.08
3.56
3.46
2.30
2.11
1.67
1.31
0.87
0.58
0.54
0.54
0.25
0.08
0.03
Source: GWI 2011.

96.
68 U r b a n C h i n a
Waste management facilities need to be
integrated into land use planning, making
greater use of environmental impact assess-ments
and permitting as regulatory tools. For
instance, contaminant hydrogeology needs
to be considered in landfill site selection and
design, but data are often lacking. Further-more,
testing, treatment, and disposal of fly
ash from incinerators needs to be improved
and unsanitary landfills rehabilitated to
minimize long-term environmental hazards
and enable a return of the land to produc-tive
uses. Operating waste management
facilities can be challenging for smaller towns
and cities. They can seek scale economies
by cooperating with adjacent jurisdictions
to develop more efficient and well-operated
waste management facilities such as landfills
or incinerators.
Strengthening the controls of chemicals
and hazardous materials
Through legislation, China should implement
declaration, hazard identification, and envi-ronmental
risk assessment procedures for the
production, storage, transportation, sales, use,
and import and export of chemical substances
and their goods and products. Hazardous and
toxic chemical substances should be identi-fied
and labeled as hazardous, and their use
should be discouraged, limited, or phased out,
or they should be substituted by green alterna-tives.
Other measures, such as process control,
risk management, and contamination control
should also be enforced to mitigate the risks
associated with chemicals and to reduce the
discharge of hazardous and toxic chemical
substances into the environment.

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Chapter 10 Ensuring Food Security
China has established a comprehensive food
policy framework with minimum grain
purchasing prices at the core, supported by
temporary grain reserves, direct food sub-sidies,
grain stock adjustments, and inter-national
trade. This framework, along with
China’s institutional reforms and produc-tivity
growth in the agricultural sector over
the past decades, has been critical to China’s
food grain security. But these policies have
not addressed problems related to distortions
in grain prices, policy inefficiencies, obsolete
grain circulation and reserve systems, and
weak food safety nets, so that they need fur-ther
improvement to meet the challenges of
urbanization.
Setting China’s food security
objectives
Food self sufficiency may be desirable for
a country with a population of 1.3 billion
people, but in view of the structural changes
in agricultural production and in food con-sumption
that have taken place over the
past decades, as well as the escalating envi-ronmental
and resource constraints, China’s
current objective of food security in all food
categories is neither feasible nor necessary.
Instead, China should redefine its food secu-rity
objectives based on the principles of effi-ciency,
openness, and sustainability. Taking
environmental capacity and resource con-straints
into account, China should strive to
unlock the potential for increased grain pro-duction
by improving productivity and mar-ket
efficiency, thereby projecting a clear and
transparent picture of China’s needs for grain
imports and exports. China should adjust its
food security objective toward maintaining
self-sufficiency in food grains while allow-ing
for more imports of nonfood grains and
other agricultural products. More emphasis
should be placed on food quality and safety,
agricultural sustainability, and protection
policies for low-income groups. Stronger
emphasis should also be placed on improving
the environmental sustainability of China’s
domestic livestock sector through better pro-tection
and management of China’s grassland
resources. The fine tuning of China’s food
security objectives needs to be complemented
by policy reforms, investments in agricultural
water resources management, and rural land
and labor market reforms.
Enhancing domestic grain
production capacity
China has raised agricultural productivity
successfully in the past. From 2004–11, total
factor productivity grew at a rate of 2 per-cent
annually for all major grain crops and
at 3 percent annually for the major vegetable
crops. If China is to increase domestic grain
production capacity, ensuring continuous
productivity growth in agriculture is a prior-ity.
Compared to many other countries, Chi-na’s
potential for increasing labor and land
productivity is significant. The potential of
productivity growth can be captured through
promoting economies of scale in agriculture,
primarily by increasing the scale of farming
operations, and through continued invest-ments
in research and development.
The process through which labor and land
productivity can grow and farmland can be
consolidated needs to be carefully coordi-nated,
and the pace of change carefully con-trolled.
Specifically, the government’s role
will be (1) to improve policies that allow rural
migrants to become urban citizens, thereby
stimulating more permanent migration to
urban areas, and (2) to create the conditions
for consolidated agricultural operations and
improved labor productivity in rural areas.
The government will need to rationalize the
rural land rights system, develop rural land
markets, and create incentives for a market-based
consolidation of farmland to allow
modern medium- and large-scale entities,
such as commercial grain producers, larger
family farms, and specialized cooperatives to
emerge.
Steady productivity growth in grain pro-duction
requires continued technological

98.
70 U r b a n C h i n a
advancements in agriculture. The key driv-ers
for technological progress are increased
public spending on agricultural research
and development, integrated programs to
promote advanced yield-enhancement tech-nologies,
mechanization in grain produc-tion,
capacity building of farm producers,
adoption of modern biotechnology, and
expedited breeding of new, improved crop
varieties. Investments will also be needed
for (1) transforming low- and medium-yield
farmland into land of higher productivity,
(2) the expansion or rehabilitation of irriga-tion
infrastructure, (3) improving on-farm
water use efficiency through better technol-ogy
and with better water-pricing policies,
and (4) the development of water users’ asso-ciations
that can help improve water use effi-ciency
in irrigation areas.
Improving agricultural
sustainability
Current practices of overfertilization need
to be changed to reduce environmental costs
and to ensure that agricultural resources and
the environment are managed in more sus-tainable
ways. Audits on heavy metal con-tamination
in major grain-producing regions
can provide the necessary baseline informa-tion,
while environmental risk assessments
can help identify key target regions for action.
The classification of key regions according
to function can be used to determine poten-tial
treatments based on the severity of con-tamination,
and crop mixes can be adjusted
accordingly. China should set sound, science-based
criteria for tillage on land contami-nated
by heavy metals. For areas where con-tamination
is severe and tillage should not
continue in the future, ecological compensa-tion
schemes can be considered to support
farmers’ jobs and incomes. The progress that
has been made on reverting farmland back to
forests should be carefully managed in order
to prevent the reclamation of already retired
farmland. The scope of the slopeland conver-sion
program should be further expanded
to also include severely desertified areas. A
special subsidy program for land quality pro-tection
should be implemented to support
farmers who opt to leave their land fallow,
readjust their land mix, or limit the use of
pesticides and chemical fertilizers.
Enhancing international
cooperation and trade
Following China’s WTO accession, progres-sive
and predictable import growth has been
shown to create win-win results. For exam-ple,
China’s growth of soybean imports has
driven global soybean production, particu-larly
in the Americas, and promoted global
trade. The benefits for China include meet-ing
growing domestic demand and saving
land and water resources. Building on these
experiences, China could strengthen cooper-ation
with major grain-producing nations by
signing medium- and long-term grain trade
agreements with such countries, and creating
stable and diversified import avenues. China
could also leverage its comparative advan-tages
and expand agricultural development
aid and investments in neighboring coun-tries
and in South America and Africa, and
actively participate in global and regional
food security governance. China should focus
on agricultural technology transfer, and
investments in processing, storage, transpor-tation,
and trade, ensuring socially respon-sible
and sustainable investments. While such
investments may not result immediately in
more agricultural products flowing to China,
they will increase other countries’ grain pro-duction
capacity and improve global grain
supply, which in turn will improve the exter-nal
environment of food security for China.
Reforming grain price formation
mechanisms
China’s grain price mechanism has resulted
in market distortions and a heavy fiscal
burden for the government, and it requires
reform. China should allow grain prices to
fluctuate freely during normal periods and
secure a food supply for low-income groups
through food subsidy programs. Only in
times of natural disaster or external shocks
should the government intervene and release

99.
o v e r v i e w 71
the state’s emergency grain reserves. China’s
grain producer price should be replaced by
a target price system. Moving away from
direct government buying in the market to
price subsidies linked to a target price (price
benchmark) should be considered. This
would separate price formation from govern-ment
subsidies, the benefits of which would
include gains to farmers and less market dis-tortion.
Such a policy has been adopted by
many countries in their transition from price
support to direct subsidies. While conduct-ing
price reform, China needs to quicken the
pace of building a food safety net for vulner-able
income groups. Food price inflation and
benchmarks for social relief and benefits need
to be better linked. For specifically vulner-able
groups, such as households in extreme
poverty, a direct food supply system should
be established.
Improving the efficiency of grain
producer subsidies
China’s existing grain subsidy policy should
be maintained to help stabilize farmer’s
income expectations. Subsidy levels should
be adjusted regularly to counter the erosion
of farmers’ gains because of rising produc-tion
costs. Current agricultural subsidies are
still comfortably below the WTO-mandated
caps, and there is room to grow further. But
China’s subsidy policy also needs reform to
meet the new food security objectives. Sub-sidies
should be better linked to yields of
grain crops, and incremental subsidies should
favor the main grain-producing regions and
producers. China may also create a special
subsidy program linked to environmental
protection to create incentives for farmers to
opt for retiring farmland or reducing output
levels.
Reforming China’s grain reserves
and circulation system
The government should carefully distinguish
between strategic grain reserves and grain
buffer stocks. Strategic reserves are built
primarily to withstand systemic grain sup-ply
shocks and such reserves should be mod-est.
Buffer stocks would be used mainly to
balance grain supply and demand between
seasons and different regions and should be
concentrated in major grain consumption
regions, especially city clusters. The share of
processed grains should be increased and the
role of local governments in building grain
reserves should be strengthened. China may
also create incentives for grain processing and
circulation enterprises to contribute to grain
reserves. And finally, China needs to improve
its network of modern grain logistics, which
run through major interprovincial corridors
and connects major grain-producing regions,
distribution centers, and transportation hubs
to and from cities and city clusters. The focus
should be on consolidating existing grain
logistics resources, creating a network of crit-ical
grain logistics hubs, and strengthening
the connections between such hubs and rail-way,
waterway, and highway transportation
infrastructure. Warehousing services should
be made more specialized and market-based,
and grain warehousing could be professional-ized
and privatized.

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Chapter 11 Timing, Sequencing, and Risks
This report has laid out the directions for
a comprehensive urbanization strategy for
China that aims to guide China’s inexo-rable
urbanization toward an outcome that
improves the quality of life for China’s citi-zens.
To use economic resources efficiently,
and maximize the benefits of urbanization,
is a leading consideration. It is complemented
by the need to make urbanization sustainable
in the face of environmental constraints and
the scarcity of natural resources that threaten
the balance between humans and nature, per-haps
irreversibly. And the objective of equity
and fairness for all—the need for inclusive-ness—
must be imperative for a harmonious
strategy that has the interests of all citizens in
mind. But the issues of efficiency, inclusion,
and sustainability cannot be dealt with sepa-rately:
they are closely interwoven. By its very
nature, the agenda spelled out in this study is
comprehensive and all-encompassing; yet the
ability of any government to design, intro-duce,
and implement reforms is restricted by
capacity and time and the measure of change
and reform that society and the economy
can agree upon and absorb simultaneously.
With these constraints in mind, authorities
will need to set priorities and carefully think
through the sequence and timeline of imple-menting
the proposed policies.
Timing and sequencing
Reforms in land, fiscal, and finance sys-tems
are at the core of the proposed strat-egy—
their implementation is important and
urgent. They support urbanization but are
also part of the overall reform strategy as
spelled out in China 2030, the report that the
DRC and the World Bank published in the
spring of 2013. That report advocates a deci-sive
move from state to market, which will
be the backbone for China’s shift to quality,
instead of quantity, of growth.
Land reform that addresses distortions
in the land market, especially in peri-urban
areas, stands out as a promising point of
departure and would lay the basis for other
reforms. It would make land on the urban
fringe open for competitive usage, contain
unsustainable urban sprawl, and help safe-guard
the rights of farmers, thus reduc-ing
a major source of social tension. While
government prepares for stronger property
rights for farmers, it may wish to tighten
annual conversion quotas in the meantime,
because most cities have sufficient land
available for their needs in the short term.
Land reform is also the basis for reforming
the urban planning system to integrate land
use with housing and infrastructure plan-ning
to arrive at a comprehensive spatial
development strategy with the objective of
creating livable cities.
Currently, cities in China finance large
parts of their expenditures through peri-urban
land conversion, and sales and reform
of the land market will eliminate this oppor-tunity.
It will therefore be necessary to intro-duce
far-reaching fiscal reforms to strengthen
the balance sheet of municipalities with new
sources of revenue either through direct local
levies and taxes or through central govern-ment
transfers. Equally urgent, government
would need to focus on local borrowing of
all kinds, first and foremost to assess whether
the situation requires action, and the just-completed
National Audit Office audit of
local government debt is a strong basis for
such an assessment. Instances of unsustain-able
borrowing would need to be addressed.
Formal access to borrowing will have to wait
until a full regulatory framework is in place,
which should follow the strengthening of
local government revenue sources. A decision
on a temporary fiscal subsidy for integrating
migrants into urban areas would accelerate
the implementation of a residency system and
could be made early on, because the fiscal
resources are already available.
Other systemic changes proposed in pol-icy
areas in this report could be implemented
over time, but presenting a comprehensive
plan for implementing the reforms would
lend credibility to urbanization. That is espe-cially
true for the sustainability agenda that
can build on China’s impressive set of envi-ronmental
laws and regulations and where
the most important task is to strengthen the
institutions, incentives, and instruments that

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enable environmentally sound urban develop-ment.
Greater authority and human resources
are needed for environmental enforcement,
and more market-based instruments should
be used so that the costs of using natural
resources and polluting the environment are
explicitly priced. These broad-based policy
considerations should be adopted immedi-ately.
But their implementation will require
focus and persistence over a long period.
Risks
The introduction of a property tax might
affect property values, with possible knock-on
effects on banks and local finances. This
risk seems limited, however. First, the pro-posed
property tax, at 1 percent of property
values, is modest compared with the current
annual increase in value of some 8 percent—
with double-digit increases in the large cities.
Second, even if prices were affected, banks
are well protected against price corrections,
because the value to loan ratio has been regu-lated,
and thus their buffers seem more than
adequate for any eventuality. An announce-ment
of the tax may cause an increase in the
supply of housing, notably of second proper-ties
currently held for investment, which is
intended and desirable.
The affordability of a property tax may
raise concerns for some. Property prices in
China are very high compared with cur-rent
incomes, especially for those who have
lived on fixed incomes for some time, such as
pensioners. Even with a low rate, the prop-erty
tax could take up a large share of cur-rent
income for some homeowners. From an
efficiency point of view, anyone who cannot
afford the property tax would have to sell
their home and move to less expensive parts
of the city, making room for those who can
afford it. That, however, may be socially
unacceptable. Other countries take care
of these risks at the low end of the income
strata with exemptions, perhaps some kind of
homestead exemption, although too high an
exemption may reduce the revenues from the
tax too much. Phasing in the tax at low rates
initially could also be considered, in part
because wages in cities are likely to adjust in
light of the tax, and people could adjust their
living arrangements, for example, by renting
out parts of their apartments to generate
income. People with more than one apart-ment
for investment purposes are more likely
to sell their additional properties, which
would improve the housing market. The
alternative to a property tax—such as taxing
property values or the value increasing only
at the time of transactions—would also solve
the problem of affordability, but would dis-tort
the property market, and the tax would
lose its basic function as a charge for urban
services on those who enjoy them.
There is a risk that allowing rural con-struction
land to be sold directly for develop-ment
could lead to rapid and uncoordinated
development. Zoning restrictions would
normally prevent this, but local govern-ments
may also be keen to expand the city
and rezone rural land aggressively. Stron-ger
property rights for farmers should pre-vent
a rush—because prices are likely to be
higher—but it may be prudent for China to
carefully scale up the successful pilots before
setting nationwide policy.
Some fear that stronger rights for rural
landholders will stop urbanization effec-tively,
because land will become too expen-sive
to convert, but this is not so. The ter-ritorial
expansion of cities may slow down,
but that should not be confused with
slower urbanization, which, as this study
has argued, can progress on existing land
through densification and redevelopment of
existing land. Also, local governments can
still convert land, when the higher price they
have to pay for rural land is warranted by its
urban use.
Finally, there is a risk that in reforming,
hukou migrants will move to receive better
benefits and services rather than for produc-tive
reasons. Previous evidence in China does
not seem to support this concern, however,
except perhaps for the largest cities. Interna-tionally,
there seems little evidence of “ben-efit
migration,” but within countries, people
do want to move to cities for better public
services such as education. That would imply
that for a transitional period the require-ments
for residency in large cities may have
to be more stringent than in other places—
but with a clear timetable for phase-out. In
the medium term, removing mobility restric-tions
and adjusting the tax structure so that

102.
74 U r b a n C h i n a
those who benefit are also taxed—through a
property tax, for example—would yield an
optimal outcome.
Institutions and governance of
the reform agenda
A comprehensive urbanization strategy
requires interactions among many actors, at
the central and local levels, and coordina-tion
between ministries and agencies will be
of crucial importance. Urbanization done
properly needs to be built on a “Whole of
Government” approach at all levels. At the
central level, cooperation and coordination
between ministries have been notoriously
difficult, and ministries tend to develop sec-tor
strategies largely independent of each
other. Looking to the broader reform agenda,
urbanization reforms should be included in
the top agenda of the Central Leading Group
for Reforms. The Leading Group should also
coordinate the formulation and piloting of
reform policies at the national level.
China will need to continue to rely on
its decentralized administrative structure to
implement reforms although a rebalancing
of the roles of central and local governments
may be required, with the central govern-ment
taking greater responsibility for policies
with national implications such as the basic
social security package. To provide incentives
for behavioral change within local govern-ments,
the central government, after setting
the overall development direction, will need
to make more effective use of its two main
mechanisms for guiding the actions of local
governments—the fiscal system and the gov-ernment
personnel system that rewards local
leaders’ success based on national develop-ment
goals.
To meet the GDP goals favored under
the personnel system, and with considerable
technical capacity and ample funds derived
from land revenue, local governments have
taken the role of implementers of urbaniza-tion
using public infrastructure construc-tion
as a way to boost short-term growth in
GDP and jobs and to meet annual targets.
In the future, to promote efficient, inclu-sive,
and sustainable development, the role
of government at all levels needs to change
to allow for the greater involvement of mar-kets.
That does not imply a diminished role
for government, but rather a different one, in
which government steps back from being the
main implementer of urbanization to becom-ing
the enabler. The proposed fiscal system
reforms, if coupled with greater incentives to
promote inclusion and sustainability through
more balanced performance targets and lon-ger
tenures, would allow local governments
to shift their primary focus from construct-ing
infrastructure to creating new policies
and practices at the local level that address
more complex and intractable problems such
as air pollution control. Local government
can also take a more active role in regulating
development, including in ensuring that local
and regional objectives for environmental
quality and social inclusion are met.
The rigidity of China’s provincial and local
administrative structure—on the one hand a
strength because it promotes local innovation
and initiative—is also a weakness because
the intense competition between provinces
and cities inhibits effective regional coop-eration.
In some areas such as the provision
of trunk transport infrastructure, regional
competition has been overcome by the cen-tral
government taking a stronger implemen-tation
role, but in others, such as manage-ment
of water and air resources, the lack of
regional planning and cooperation has led to
an escalation of negative impacts. Regional
solutions that stretch beyond provincial and
municipal boundaries will be needed to bet-ter
manage metropolitan areas in order to
capture agglomeration benefits and manage
externalities.
Finally, greater participation of China’s
citizens in the urbanization process would
enhance accountability of local governments
and ensure that policies are responsive to
local needs. In some areas, China has a rela-tively
mature system of citizen involvement—
examples are local elections, consultation pro-cesses
for environmental impact assessments,
and China’s long-established complaints
system. But in many cases, the usefulness of
citizen involvement is diminished by the lack
of access to information. Especially in the
field of environment, greater transparency

103.
o v e r v i e w 75
and disclosure of pollution information,
including compliance data, would enhance
citizens’ ability to engage constructively and
meaningfully.
Notes
1. From 2000 to 2010, urban natural increase,
net migration, and urban reclassification
accounted for about 15, 43, and 42 percent of
urban growth, respectively.
2. ADB 2012a; Rosenthal and Strange 2003;
Black and Henderson 1999; Lucas 1993.
3. World Bank 2009.
4. Glaesser and Joshi-Ghani 2014.
5. Campos 2012.
6. Black and Henderson 1999; Lucas 1993;
Rosenthal and Strange 2003.
7. Desmet and Fafchamps 2006.
8. World Bank 2013.
9. Conventional investment numbers are mea-sured
as “fixed capital formation,” which
in China is available only at the national
level. At the city level, China publishes data
on “Fixed Asset Investment,” which covers
investment in existing assets, including land.
This measure tends to drive up ICORs when
asset prices rise more rapidly than capital
goods prices. Thus, city-level ICORs are not
comparable with national or international
ones.
10. Authors’ estimates based on NBS data: www
.stats.gov.cn/english/Statisticaldata.
11. This paragraph largely draws from the NBS
Migrant Survey, December 2012.
12. DRC 2014.
13. DRC 2014.
14. Hort and Kuhnle 2000; Kwon 2007; Knight,
Li, and Song 2006.
15. Cai and Henderson 2013.
16. Huang, Wang, and Qiu 2012.
17. Huang, Wang, and Qiu 2012.
18. Deininger and Jin 2008.
19. Bank staff estimates of the correlation
between urban land price increases and den-sity
using CEIC data.
20. This extraordinarily high share of labor
reflects in part the lack of mechanization in
agriculture (see chapter 4), but it may also
result from a low remuneration for agricul-tural
land.
21. In comparable international prices.
22. Authors’ calculations based on NBS 2013.
23. China Development Research Foundation
2010.
24. Gan and others 2013.
25. Davies and others 2007. Note that the data
from the China survey are not necessarily
comparable to the numbers in this paper.
26. Caselli and Coleman 2001.
27. Knight, Li, and Song 2006.
28. Interprovincial migration in China rose from
25 percent of all migration in 2000 to 32 per-cent
by 2010; in the United States, it consti-tuted
nearly 50 percent from 1947 to 2012.
29. Page 2011.
30. Gallagher 2013.
31. Liu 2008; Wang 2010.
32. In March 2011, the State Council (2012)
drew up A Notice on Actively and Stably
Pushing Forward the Hukou System Reform.
The full text was released in March 2012.
33. Zhang and Tao 2012; Zhang 2012.
34. Barrett, Joyce, and Maitre 2013 and Dust-mann,
Frattini, and Halls 2010.
35. Meng and others 2012.
36. Man, Zheng, and Ren 2011.
37. Man, Zheng, and Ren 2011.
38. Li 2012; Huang and Jiang 2009; Logan,
Fang, and Zhang 2010; Zhang and Chen
2014.
39. ht tp: //www.labour-dai ly.cn/web/New
LabourElec t ronic /newpdf / PdfNews
.aspx?Calendar=2011-9-24.
40. PBOC 2013.
41. Lall, Timmins, and Yu (2009) evaluated the
relative importance of wage differences and
public services in migrants’ decisions to move
in Brazil. Their findings showed a distinction
in preferences according to income level: for
relatively well-off people, basic public services
were not important in the decision to move,
but for the poor, differences in access to basic
public services did matter.
42. Liu, Park, and Zhao 2010.
43. Sugar, Kennedy, and Leman 2012.
44. Currie and Vogl 2012; Currie and Neidell
2005; Padula and others 2013.
45. MEP 2013.
46. NBS database.
47. DRC and ERI 2009.
48. OECD 2009.
49. World Bank 2011.
50. Weber and others 2008.
51. Feng and others 2013.
52. World Bank and DRC 2013.
53. Based on income.
54. See supporting report 6, “Financing Urban-ization,”
for details of the model and
simulations.
55. World Bank Institute and PPIAF 2012.
56. Ruggeri-Laderchi, Olivier, and Trimble 2013.